In todays article Im going to look at two stocks I believe could be good buys for income and growth in 2016.
Commodity group Glencore (LSE: GLEN) was given a hard time by investors earlier this year, as a result of fears that its debt situation could become unmanageable.
Chief executive and 8.3% shareholder Ivan Glasenberg was initially reluctant to take action, but has since become quite enthusiastic about reducing Glencores debt. On Thursday last week, Glencore announced an extension to its debt reduction plans. The group is now targeting net debt of $18-19bn by the end of 2016, down from a previous target of low $20s billion.
Mr Glasenberg was also at pains to emphasise that his business remains profitable and cash-generative, even at current commodity prices. According to last weeks update, Glencore expects to generate more than $2bn of free cash flow this year at current spot prices. The group says it would continue to generate free cash flow even at materially lower price levels.
Interestingly, Glencore says that its trading business, which buys and sells commodities in bulk, is expected to deliver an adjusted operating profit of $2.5bn this year and $2.4-$2.7bn in 2016.
In my view, thats enough to comfortably justify Glencores current share price, as long as any losses in its mining division can be contained. Id also suggest that if Glencore can produce that kind of profit in todays market conditions, then profits could grow rapidly when market conditions improve.
As things stand today, Glencore trades on around 0.4 times its book value and around 5.5 times 2015 forecast free cash flow. Id say thats cheap enough to justify a closer look.
Indeed, I believe Glencore shares could easily double when market conditions start to improve. In the meantime, the stock offers an attractive 4% forecast yield.
Im no longer in any doubt about whether Glencore will survive the downturn, so Id rate the group as a cyclical recovery buy.
Lloyds Banking Group
Shares in Lloyds Banking Group (LSE: LLOY) have continued to slip lower in recent days. I cant really see any reason for this, other than the continued effect of government share sales into a well-supplied market.
As Ive commented before, I expect Lloyds share price to stabilise and start to rise once the government finishes selling its stake in 2016.
In the meantime, I believe Lloyds shares are a good buy. The banks stock currently trades on around 9 times forecast earnings and offers a forecast yield of 3.5% for 2015, rising to 5.3% in 2016.
Another attraction is that at 70p per share, Lloyds is trading just 2p above its book value of 68p per share. This should give good downside protection. I wouldnt expect the share price to drop much below 68p without major new problems coming to light. At present, theres no sign of this happening.
Lloyds looks to be an ideal income growth stock for 2016 and beyond. Buying now should lock in an attractive dividend yield, making the shares an appealing long-term hold.
Despite my optimism, it’s worth remembering that both banking and mining carry considerable industry-specific risks.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.