These two growth stocks have enjoyed mixed fortunes in 2016 but they still remainbright prospects. What doesthe future hold?
Bundle of fun
Afterringing up success after success over the last five years, during which timeits share price more than doubled,BT Group(LSE: BT.A)hasntlooked such a good call lately. Todays share price of 359p is25% down on its year high of 502p, as investor sentiment slips.
Yet 2016 started well enough for the group, withan expectations-beating 16% rise adjusted pre-tax profit to802m and its successful purchase of EE inJanuary. More than25m broadband connections, growing quad-play bundle success and itsaggressive assault on footballbroadcasting encouraged many investors to sit up and take notice. So where did it all go wrong?
Q2results published last week show that BT is still on the attack, withnet profit hitting566m aftera 35% jump in revenue to 6.05bn. This was driven by the successful EE integration and the extra cash inflows helped BT raise its interimdividend10% to4.85p. BT Sport also looks a winner, although the results wont fully reflectthis seasons shock fall in football viewing figures. Even weaker sterling has been on its side, adding 154m tothe top line.
Quad squad
However, a shadow hangs over BT Group in the shape of its pension scheme deficit, and it has grown darker lately. The companysnet pension deficit at 30 September was9.5bn, up from 6.2bn just three months earlier, due to falling yields and risinginflation expectations. Thats a leap of more than 53% in just three months, and couldmake it harder for BT to fund future dividend progression.
However, four things make BT the right quad-play call forme: healthy 2.4 dividend cover, an undemanding valuation of 11.4 times earnings, telecoms market dominance and recent share price weakness, which I reckon could present a buying opportunity.
Viva Tinto
The recovery at FTSE-listed mining giant Rio Tinto (LSE: RIO) is already wellunderway. The stock is up almost 80% since plungingto a low of 1,577p during JanuarysChina crisis. Its now trading at a 52-week high a rarity among stocks Ive covered lately, so momentum is on its side.
Investors have continued tochase the Rio Tinto share price higher, encouraged by itsrecent Q3 production results, which sawchief executive J-S Jacques throwing around phrases such asstrong quarterly production improving operational performance operational excellence continued focus on value rigorous attention to cash generation delivering shareholder value.
Metal magic
All of that will count for little if China finallycrashes and commodity prices follow, or a US rate hike inDecember drives up the cost of dollar-priced commodities, hitting demand. Earnings per share are forecast to fall in 2016 for the third year running but theres some hope on the horizon, with a predicted 9% leap next year.
Rio Tintos forecast yield is set to fall from todays 6% to around 3.2%. Trading at13.89 times earnings, itisnt dirt cheap either. But after battling hard to withstand the slump in metals prices, Rio Tinto looks a solid choicefor the longer term.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
