Income stocks feature heavily among these 28 top tips for 2024

Next (LSE:NXT), Whitbread (LSE:WTB) and Games Workshop Group (LSE:GAW) are among top picks after a City bank selected 28 stocks for investors whose priority is balance sheet or cash flow strength.

Peel Hunt’s rundown of financially robust businesses takes the place of its annual list of income stocks, which in 2023 delivered a weighted return of 14% after strong performances by housebuilders Barratt Developments (LSE:BDEV) and Taylor Wimpey (LSE:TW.).

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The names included in 2024’s “financial fundamentals” list fared well last year, with an 18% return amid very low levels of leverage. The free cash flow (FCF) yield, which is a preferred measure of company performance for many investors, is an average of 8.6%, rising to 9.1% in the second year of Peel Hunt’s forecasts.

The list is dominated by four companies each from the oil and gas and support services sectors, including Ithaca Energy Ordinary Share (LSE:ITH), MITIE Group (LSE:MTO), Serco Group (LSE:SRP) and Kier Group (LSE:KIE). Kenmare Resources (LSE:KMR) and Howden Joinery Group (LSE:HWDN) are among three contributions each from mining and building materials.

One of the highest yielding is FTSE 250-listed Diversified Energy Co (LSE:DEC), which is focused on the acquisition, production and retirement of natural gas assets in the United States.

It reported record production and lower unit costs during 2023 but a weaker US gas price has impacted its shares, which fell 44% last year. The stock now trades on 2023 dividend and FCF yields of 25% and 52% respectively.

The bank said: “Like many in the market, 2023 was a tough year for Diversified’s shares. However, the fundamental cash flow generation ability of the asset base is undimmed, offering investors an incredibly attractive entry point into this high-quality company.”

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There are five other stocks on Peel Hunt’s list with projected dividend yields above 10%, ranking in size from Ithaca Energy at 14.7% followed by PetroTal Corp (LSE:PTAL), Kenmare Resources, Central Asia Metals (LSE:CAML) and Serica Energy (LSE:SQZ).

Away from the higher-yielding stocks in natural resources, the bank likes Mitie Group and Serco for balance sheet optionality that opens up the potential to increase shareholder returns through bolt-on acquisitions or share buybacks.

On Mitie, it said: “The company has delivered strong profit momentum over recent years with a series of earnings upgrades, and we expect this to continue over the medium term.”

Peel Hunt has backed Mitie shares to go 41% higher at 137p, while the target price for government outsourcing firm Serco sees shares lifting another 35% to 217p.

Retailer Next is included on the list as a “consistent compounder”, with its steady growth, top-quartile return on capital employed and strong cash returns driving double-digit total shareholder return “year in, year out”.

The bank, which has a 9,300p target price, said: “Next has clear direction, and shareholders can take confidence in a CEO and leadership team with a long-term track record of delivery. ”

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The qualities of Whitbread include a rock-solid balance sheet, which is seen as a key strategic advantage when it comes to acquiring prime freehold and leasehold sites. It also has the security of market leadership through Premier Inn’s 12% of the UK hotel market.

Peel Hunt believes the shares have a 12% upside to 4,000p: “We suspect that Whitbread is undervalued because the implications of leadership are under-appreciated. We believe that it will continue to invest and grow, and squeeze out higher-cost and lower-quality competition.”

Shares in Games Workshop are not cheap on 23 times 2024 forecast earnings, but Peel Hunt believes long-term prospects for the Warhammer hobby and for royalty income mean there’s “material share price appreciation potential”.

Good margins are behind the inclusion of Howden Joinery as the resulting strong cash flows have enabled the kitchens trade supplier to invest in manufacturing facilities and branch expansion as well as to return excess capital to shareholders.

It said: “Howden Joinery has delivered consistently for a long time and as a result is well regarded among investors. While the shares have performed in 2023 and are well rated, we still think there is more to come in terms of market share and capital returns in the medium term.”

The other stocks on the Peel Hunt “financial fundamentals” list for 2024 are AB Dynamics (LSE:ABDP), AG Barr (LSE:BAG), FirstGroup (LSE:FGP), Grafton Group Units (LSE:GFTU), Hikma Pharmaceuticals (LSE:HIK), Hollywood Bowl Group (LSE:BOWL), Man Group (LSE:EMG), Renew Holdings (LSE:RNWH), Sirius Real Estate Ltd (LSE:SRE), Spectris (LSE:SXS), Syncona Ord (LSE:SYNC), TP ICAP GROUP (LSE:TCAP), Volution Group (LSE:FAN), Wheaton Precious Metals Corp (LSE:WPM) and Wincanton (LSE:WIN).

ii Head of Editorial Lee Wild own shares in Diversified Energy Company