AJ Bell’s Russ Mould highlights four noteworthy stocks for 2023

by | Dec 15, 2022

  • Cautious: Imperial Brands
  • Balanced: Lloyds
  • Adventurous: Zytronic
  • Income: Lancashire


“The FTSE 100 has been very resilient in 2022, coming in broadly flat despite everything that has been thrown at it, but the FTSE 250 and AIM benchmarks have suffered bruising bear markets and sentiment toward the UK equity market overall is downbeat,” says AJ Bell investment director Russ Mould. 

“Perhaps the best argument in favour of UK stocks therefore is the pessimism which surrounds them, because unloved can mean undervalued and there may be more than a few nuggets of value to be had as 2023 approaches, with something there to appeal to a range of investor requirements and risk appetites.”

Cautious – Imperial Brands (IMB) £20.35 

Smoking is not everyone’s idea of a good way to relax but the globe seems no nearer to kicking its nicotine habit than it does its reliance upon oil and gas. Whether we like it or not, this provides opportunity for those investors who are prepared to be pragmatic and trade in the markets, and world, they have, rather than the one that they want. To put none too fine a point on it, Imperial Brands (IMB) still looks cheap as it offers a yield of 7% and comes on a price/earnings ratio of barely eight times.

Ethical investors will be entirely unmoved, but harder-nosed portfolio builders will note with interest a gathering string of upbeat trading statements from chief executive officer Stefan Bomhard. Global cigarette volumes are under pressure and will remain so over the long term as regulatory pressure is unlikely to abate, but Imperial Brands believes it is taking market share and, most powerfully from an investment perspective, the FTSE 100 firm is successfully pushing through price increases. They are supporting revenues and profits, which in turn are supporting cash flow. That cash flow funds not just the £1.3 billion annual dividend payment but also the newly-launched £1 billion share buyback, that will run out to the end of September 2023.

Balanced – Lloyds (LLOY) 46.3p

Some investors may think that picking a bank is looking for trouble, especially when interest rates are rising, the risk of increases to bad loan provisions is growing and all of the talk is of an imminent recession. They may be right, too, but Lloyds’ shares trade at a discount to the last-reported tangible net asset value (NAV) per share figure of 49p, come on a mid-single digit earnings multiple and offer a dividend yield of more than 5% for 2023. The economic outlook is indeed difficult, but it can be argued that the stock is pricing in a lot of the potential bad news already.

Lloyds’ shares trade no higher now than they did in late 2012, even though the bank has paid out £11.8 billion in dividends and returned another £2.1 billion in cash to shareholders via buybacks over the past decade.

That equates to more than 40% of the bank’s current market capitalisation and there should be further cash returns to come, even if the latest buyback is now complete, in the shape of further dividends. Sentiment toward the stock remains resolutely downbeat, but net interest margins are expanding and loan losses in 2022 are undershooting expectations, so it may not take much to provide upside surprises. Meanwhile, Lloyds’s balance sheet is far stronger than it was back in 2007, if regulatory ratios are anything like a reliable guide, and that, coupled with the lowly valuation, will hopefully provide some downside protection if anything unexpected does go wrong in 2023.

Adventurous – Zytronic (ZYT:AIM) 142p

By their very nature small-cap stocks are risky and micro-caps all the more so, as they can be reliant upon a certain product, customer, country or individual and thus have less margin for error if something goes wrong. With a market cap of just £15 million, and annual sales of £12 million, Zytronic is a real micro-cap but one with huge potential, especially as it an export success story. Better still, the balance sheet offers some downside protection, as net cash position of £6.4 million covers nearly half of that market cap.

A leading maker of rugged, touch-sensitive screens, Zytronic has suffered a difficult couple of years, thanks to the crackdown on gaming terminals in betting shops, bank branch closures and falling numbers of ATMs, as well as also COVID. Supply chain issues have not helped either.

However, the Newcastle-based firm felt confident enough in 2022 to buy back stock and pay a dividend, as the order book and sales began to recover, particularly in the fields of vending and gaming, helped by new product developments in screens, buttons and touch sensors.

Zytronic has been through some big swings in sales and profits since its stock market debut in 2000 and emerged from them all, thanks to its healthy balance sheet. It may be asking a bit much to expect net profit to return to 2017’s prior peak of £4.6 million or the dividend to get back to 2019’s 22.8p a share, but any movement in that direction could leave the shares looking very cheap, given the modest market cap.

Income seekers – Lancashire (LRE) 609p

Lloyd’s of London syndicate manager Lancashire may seem like an odd choice as a potential income play when the FTSE 250 member offers a prospective dividend yield of just over 2% for 2022. But after the Russian invasion of Ukraine, Hurricane Ian and other major events, prices in the catastrophe insurance and reinsurance market look to be firming nicely as some capacity is taken out and the strong take up the slack. Higher rates can mean higher profits and cash flow funds dividend payments, an area where Lancashire has an excellent track record.

The manager of Lloyd’s syndicates 2010 and 3010 has already paid out total dividends worth just over 820p a share since its listing in 2008. That figure looks good next to the current share price, and with further dividends to come Lancashire could yet re-establish itself as an attractive yield play.

There is always the risk of an unforeseen event in 2023 and it can be argued that climate change raises the stakes, so dividend growth is far from certain next year. But a further positive is that the company is one where higher interest rates could mean good news, not bad.

Non-life insurers hold substantial bond portfolios as they look to match potential payment liabilities with reliable income from coupons. Higher bond yields boost returns on investment and thus earnings.

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