Six value-based UK share tips for 2016

Lightbulb with moth flying around

This year picking three long-term value growth prospects and three long-term value income prospects has been easier than in previous years.

I've developed a 'decision engine' to rank all the shares I track. The highest-ranking are those businesses most likely to earn a good return on their current share prices over many years, based on estimations of the risks they face and on their market valuations.

The three income selections featured here are highly ranked companies that also pay an above-average dividend yield. The dividend yield calculation compares the per-share value of the dividend with the share price. The median dividend yield for UK shares is just under 2.5 per cent.

Like the growth selections, the income selections are highly profitable, so I expect growing dividends over the long term. There are no guarantees, though, which is why it's sensible to include such holdings in a larger, more diverse portfolio such as the Share Sleuth portfolio.

VALUE-BASED GROWTH

Goodwin (GDWN)

The engineer faces a challenge in the short term. Goodwin is quite a diverse group of businesses, but a significant amount of profit, perhaps more than half, comes from the oil industry.

Low oil prices have stymied oil company investment, which means Goodwin's profitability over the next few years will suffer. The firm has prospects in other markets though, and its experienced management should steer it through. Meanwhile shares are cheap.

Dewhurst (DWHT)

Unflashy Dewhurst makes components for lifts and ATMs. It was originally a push-button manufacturer, but it's 'moving up the value chain' by supplying complete push-button assemblies in panels, displays and lanterns.

The company has been reliably profitable for decades, and it is underappreciated by investors, perhaps because, like all six of this year's selections, most of its shares are controlled by members of the firm's founding family. Family ownership is often a source of stability, as shareholders in Dewhurst have found over the years.

Renishaw (RSW)

Renishaw is the only company tipped with a market valuation of more than £1 billion. It manufactures machines, probes, sensors and gauges that help automate, control and test other machines, and make manufacturers more efficient.

Its technology puts it at the forefront of advances in manufacturing (in 3D printing, for example) and should open up opportunities in healthcare (it makes surgical robots).

High profitability in its most recent financial year, due to a surge in orders from smartphone manufacturers, won't be matched for a while, but Renishaw's long-term prospects are good.

VALUE-BASED INCOME

Science (SAG)

Science is the new form of Sagentia. The original Sagentia is now the largest part of a group of research and development consultancies acquired in recent years and focusing on consumer, healthcare and energy markets. Its scientists work with large multinationals to develop their intellectual property and advise them.

Science's biggest selling point may be its location near Cambridge, a hotspot for innovation in the UK.

Science's profits will be dented by its latest acquisition, Leatherhead Research, which was bought from the administrator and is currently loss-making, but Sagentia has a cash hoard and is capable of sustaining the dividend. Analysts expect its 2016 dividend to be unchanged*.

Castings (CGS)

Profitability at Castings varies, generally in line with European fuel emissions legislation. The firm manufactures car and van parts for European manufacturers. Ahead of new legislation, demand for older, cheaper models tends to rise, temporarily lifting sales and profit.

The company has sustained high, if variable, levels of profitability and increased its dividend in all but two of the past 20 years. In 2009 and 2010, during the financial crisis, it maintained the dividend at the same level as 2008. The yield forecast for 2016 is 3 per cent.

Portmeirion (PMP)

Potter Portmeirion is famous for its eponymous brand and two other household names, Spode and Royal Worcester, which it acquired when many British potteries were struggling against cheap foreign imports.

Despite investing in additional manufacturing capacity, it has been able to raise its dividend by more than 10 per cent in each of the past three years. Analysts expect the firm to raise it again in 2016 to 3 per cent.

*Dividend forecasts from Sharescope. Data as at 4 December 2015.


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