Best Of British: 3 Post-Brexit Best Buys

Includes: LYG, NGG, UN
by: Edward Frost


3 stocks to look at after the Brexit volatility.

An update on Lloyds.

It's time to take advantage of the weak pound.

The Brexit vote has caused a devaluation in the value of the British pound, and this provides an opportunity for US investors to take advantage and buy at a discounted rate. In this article, I discuss 3 potential British stocks to buy after the Brexit vote, and subsequent fall in the value of the pound. I take another look at Lloyds Banking Group (NYSE:LYG) and discuss what's changed since I last covered the stock back in November. I also look at Unilever (NYSE:UN), a dividend aristocrat with some of the world's best known and most valuable brands, and National Grid (NYSE:NGG), a seemingly boring stock that pays a bountiful dividend and has growth plans for the future. So surely now is a good time to buy British?

It's been nearly 12 months since I last wrote about Lloyds Banking Group (also LSE:LLOY), and during that time, things have changed. The Financial Conduct Authority has increased the deadline for PPI claims to 2019, from a previously expected 2018 cut-off; the UK has voted to leave the EU, with the consequences and true cost yet to be discovered; and interest rates still stubbornly refuse to move in the bank's favor. The ADS shares are down over 36% year-to-date and sit well over 40% lower than when I wrote about the company back in November. With 2016 and 2017 earnings estimates cut, surely this is a stock to stay well away from?

Lloyds' stock is currently trading at 7.2x this years' earnings and 8.3x 2017 earnings, so describing the stock as 'cheap' would be a bit of an understatement. A low P/E multiple is not a reason to buy a stock, but a strong dividend could be; Lloyds currently yields 4.4%, but dividends are set to increase. 3.1 pence per share is expected in 2016, representing a 5.8% yield at current prices and the dividend rises further in 2017 to 3.5 pence, which is a 6.6% yield.

With yet another round of job cuts just this month, and now offering lower interest rates on current accounts (which as a customer is somewhat annoying), the bank is continuing to cut costs. Despite fears of an extended PPI deadline, the bank has already made provisions which should more than cover the costs, and if these provisions go unused, they can be returned to shareholders at a later date.

The issue with LYG is that there is little reason for the stock to go higher any time soon. Brexit and its consequences are still unknown, and the UK government is yet to sell its remaining 9.1% stake in the bank. Market volatility prevented the sale back in summer, but with prices now in the mid-50s or ~$2.70 for the NYSE-listed shares, it seems that everyone is waiting for the stock to go higher.

Lloyds is a similar story to that of last year. When interest rates rise, the bank will increase its Net Interest Margin and make more money on every loan it sells. Let's wait until Her Majesty's government has sold its remaining stake, and it won't be long until the PPI saga is finally in the rear view mirror. After that, Lloyds is the market leader in a strong UK economy; with rising house prices and falling unemployment, Lloyds will prosper in the long run.

Unilever boasts an impressive portfolio of brands across many worldwide markets, including Knorr, Hellmann's, Lux, Dove, Cif, Surf, Lipton and many more. The company reports its earnings in euros because of its Anglo-Dutch roots, but Unilever manages to achieve €1 billion or more in annual sales on 13 different brands.

Unilever sells to 2 billion consumers every day in 190 different countries, but what's even more impressive is that over half of these sales happen in emerging markets, which is something that many large blue chip stocks cannot boast.

Although sales were flat in developed markets, emerging market sales grew 7% Y/Y, as the company continues to grow overseas and tap into previously uncharted territory. Unilever sells frequently used products that have a low price, and is therefore very resistant to economic downturns, as people still need to clean and eat, even when times are tough.

The emerging market focus should mean the company flourishes when the world economy is strong, as increased buying power means more and more people can afford to buy Unilever's products. With a dividend yield upwards of 3% and trading at ~20x earnings (a very fair valuation given yield and brand value), Unilever is a very attractive proposition right now.

National Grid is not the most exciting of companies if we're being honest. The firm owns and operates the electricity lines in England and Wales, as well as 2 stations in Scotland and Northern Ireland, as well as gas piping in the same regions and some in New England.

National Grid's main business model is charging other companies for the use of its infrastructure, which is a very low risk strategy. Because of the monopolies involved, the company is subject to strict regulation from both the UK and US governments, but this is because the firm's assets are vital to the economies in which they operate, meaning National Grid will always have customers, regardless of economic conditions.

Unfortunately, there's no such thing as a free lunch. These assets require heavy up-front investment; the company plans to spend £40 billion between now and 2021. But, because of the steady stream of 'guaranteed' income, the firm never has trouble raising money.

With a 4.2% dividend yield and trading at 16x earnings, this stock is definitely one to consider holding for the long haul, especially as the USD will now buy more shares than ever before.

These three are all good companies in their own right, some more risky than others, but all definitely worth investigating further for anyone looking to invest in the UK.

Disclosure: I am/we are long LYG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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