The FTSE 100 has done well so far in 2024. In fact, it’s made a series of new all-time highs in recent weeks.

At the same time, the UK continues to be a hotbed of takeover activity.

According to research by the Evening Standard and investment bank Peel Hunt, “companies worth over £26bn have already agreed to be sold in 2024, to other listed firms or private equity.“

Even though the Footsie is on a tear, the amount of deal-making going on suggests to me there are plenty of UK stocks that trade buyers and private capital view as undervalued.

Let me tell you about three FTSE 100 firms that could be ripe for a bid.

Target #1

Burberry‘s (LSE: BRBY) shares have slumped from an all-time high just over a year ago. And its market capitalisation has shrunk from near £10bn to little more than £4bn.

The backdrop for this is a slowdown in demand for luxury fashion. Abrdn investment manager Sasha Kachanova recently told the Telegraph: “Burberry remains a potential takeover target, particularly at its current valuation.“

Cheap, unique and desirable

In addition to Burberry’s low valuation (relative to peers like LVMH Moet Hennessy and Hermès), Kachanova made another good point. She said: “As the sole British brand of scale operating independently — a rarity in the luxury industry — it boasts a rich heritage and the opportunity to enhance its iconic product lines and accessories.“

This is significant because consolidation is the name of the game in the luxury sector. Most recently, Tapestry (owner of Coach, Kate Spade, and Stuart Weitzman) has agreed an $8.5bn acquisition of Capri Holdings (owner of Jimmy Choo, Michael Kors and Versace), although the US competition watchdog is trying to block the deal.

Given Burberry’s low valuation and unique positioning as an independent, distinctly British luxury fashion house, it’s hard to believe it’s not of interest to sector consolidators.

Target #2

Standard Chartered (LSE: STAN), with a market capitalisation of around £20bn, is one of the big five FTSE 100 banks. It has a unique footprint across the world’s most dynamic markets and trade corridors in Asia, Africa and the Middle East.

Its shares can currently be bought at a 33% discount to its tangible net assets. The directors chastised the market for its low valuation of the stock earlier this year. And I reckon that can be partly read as a tacit acknowledgement that the bank could be vulnerable to a bid.

Takeover talk

In January last year, US financial site Bloomberg reported that First Abu Dhabi Bank was working on a takeover of Standard Chartered. First Abu Dhabi confirmed it, but said it had decided not to proceed.

This year, UK deals site Betaville has reported rumours of renewed interest in Standard Chartered. The speculation is the interest is from ‘the Gulf region’.

Meanwhile, Ian Lance, co-manager of Temple Bar Investment Trust, has suggested potential wider interest. “If a big US bank wanted to have a footprint across Asian markets, they could buy Standard Chartered,” he told fund data website Trustnet.

Target #3

Reckitt (LSE: RKT), the Cillit Bang-to-Durex consumer goods group, has been out of favour with investors for some time. It’s still the biggest of the three ‘takeover targets’ I’m highlighting today, with a market cap of over £30bn.

However, consumer goods companies as big as drinks giant Diageo (£60bn) and even Unilever (£105bn) have been touted recently as possible takeover targets in some quarters.

Obvious, but with a caveat

Russ Mould, investment director at broker AJ Bell, said recently: “Reckitt looks like the most obvious takeover target on the FTSE 100 given a sharp decline in its share price following strategic mistakes and legal action around one of its baby formula products.“

However, that legal action, which Reckitt is appealing, could potentially lead to multi-billion-dollar compensation liabilities. So, while Mould sees Reckitt as the most obvious Footsie takeover target, he’s absolutely right to concede: “The big unknown is whether someone would want to pounce now or wait for the legal issues to be resolved.“

Final Foolish thoughts

I wouldn’t want to invest in Reckitt, Standard Chartered or Burberry simply in the hope of making a quick profit from a takeover bid.

No, for me, it’s more a case that companies can often make for good long-term investments when they have the kind of business characteristics and depressed market valuations that are likely to be fundamentally attractive to trade or private equity buyers.

Having said that, I do expect the spate of takeovers of London-listed companies to continue!

The post 3 FTSE 100 takeover targets appeared first on The Twelfth Magpie.

More reading

• Are we staring at a once-in-a-decade chance to buy cheap FTSE 100 shares like this one?
• 3 UK shares to consider buying and holding for a decade
• 2 FTSE 100 stocks that are undervalued, according to City brokers
• Despite trading near a 16-year high, this FTSE 100 financial giant looks an absolute steal to me at under £19!
• If someone starts investing now with £18 a day, how much might they have by Christmas?

Graham has no position in the stocks mentioned. The Motley Fool UK has recommended Aj Bell Plc, Burberry Group Plc, Diageo Plc, Reckitt Benckiser Group Plc, Standard Chartered Plc, and Unilever Plc.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It’s the time of year when an old stock market adage is given its annual airing: “Sell in May and go away, come back on St Leger day.“

Its origin is lost in the mists of time, but the idea is that investors can improve their returns by selling their stocks in May and buying them back in September (when the St Leger horse race — inaugurated in 1776 — is run).

Maybe the strategy had some merit in the past, but having crunched the FTSE All-Share index numbers for the last 10 years, I see no compelling evidence it’s a smart idea today.

Let me tell you about three FTSE stocks I’d far rather buy (or hold) than sell. And say a few things about ‘Sell in May’ while I’ve got the bit between my teeth.

FTSE All-Share

First off, those FTSE All-Share numbers I mentioned. The index contains the largest number of UK main market companies. It also covers the widest range of market capitalisations — from £100bn giants like HSBC down to sub-£100m small caps like Topps Tiles.

The figures below show the index’s percentage rise/(fall) between mid-May and St Leger day for the last 10 years:

• 2023: (1.1)
• 2022: (1.9)
• 2021: 1.1
• 2020: 5.6
• 2019: 1.4
• 2018: (4.8)
• 2017: (2.9)
• 2016: 9.6
• 2015: (11.8)
• 2014: (0.3)

As you can see, there were four years when the index made gains and six years when it fell. This doesn’t strike me as a particularly persuasive advertisement for the Sell in May strategy.

Furthermore, I’d suggest that in at least two of the years when the index fell — 2014 (-0.3%) and 2023 (-1.1%) — selling in May and buying back in September would nevertheless have left small investors worse off.

How so? Principally because of the trading costs incurred in the selling and re-buying round trip and the loss of dividend entitlements during the period out of the market.

Brands powerhouse

Diageo is a £63bn blue-chip company. I like its powerful stable of over 200 drinks brands. These include Johnnie Walker, Smirnoff and Guinness. I also like its impressive history of dividend growth since it was formed by a merger of Guinness and Grand Metropolitan in 1997.

The shares are currently out of favour with the market because the macroeconomic backdrop is challenging. However, this could mean the stock offers value today.

A rating of 19 times forecast earnings and a prospective dividend yield of 2.8% are cheap by Diageo’s historical standards. Incidentally, sellers in May would miss out on the year’s final dividend to which shareholders will become entitled in August.

Niche real estate

Primary Health Properties is a £1.2bn mid-cap company. I like its niche within the real estate sector. Its tenants, such as GP surgeries, are under long leases, and nine-tenths of its rental income is backed by the UK and Irish governments. It’s delivered 27 consecutive years of dividend growth.

The shares looked distinctly overvalued a couple of years ago. At their peak, they traded at a 47% premium to assets with a dividend yield of 3.6%.

However, today — at a 15% discount to assets and with a 7.5% yield — they look a lot more attractive. Sellers in May would miss the entitlement (in July) to the third of the company’s quarterly dividends.

Wizard performer

Bloomsbury Publishing has a market capitalisation of £450m and is one of the larger companies in the small-cap universe. It was once very much smaller. The value of its shares has increased by over 2,000% since it joined the stock market in 1994.

It’s famed for its punt on an unknown author in 1995: JK Rowling. But there’s a lot more to its success than riding on the back of Harry Potter’s broomstick.

The shares have hit all-time highs this spring, and I’m not sure I’d be rushing to buy right now. However, there’s undoubtedly strong momentum in the business. Management has said it expects revenue and profit to be significantly ahead of its already upgraded guidance.

If I owned the stock, I’d be inclined to continue holding (including for the July entitlement to the year’s final dividend), based on the company’s record of delivering terrific value for shareholders.

Just three of many

I’ve highlighted Diageo, Primary Health Properties and Bloomsbury because of their range across the large-, mid- and small-cap arenas.

However, they’re just three of many UK stocks I’d far rather buy (or hold) than sell in May in the hope of lower prices come St Leger day.

The post 3 FTSE stocks I wouldn’t ‘Sell in May’ appeared first on The Twelfth Magpie.

More reading

• 3 UK shares to consider holding in a Stocks and Shares ISA for a decade
• Where should value investors look for stocks in June?
• The latest broker outlooks on Greggs shares look wacky, so what’s happening?
• 2 FTSE 100 dividend stocks that stand out for shareholder returns
• Just 9% of us can expect a ‘comfortable’ retirement! Could UK shares be the answer?

A couple of things drew my attention to one particular FTSE 100 company last week.

First, 6 April marked the 25th anniversary of the merger of Sweden’s Astra AB and the UK’s Zeneca Group to form AstraZeneca (LSE:AZN).

And second, perhaps fittingly for the anniversary week, the biopharmaceutical firm made three positive announcements on drug trials/regulatory approvals.

Over the last quarter of a century, AstraZeneca has grown into one of the FTSE 100’s powerhouses. In fact, it became the Footsie’s biggest company for the first time in 2020.

Questions

One interesting question is: how did AstraZeneca get to where it is today?

Another, more pertinent one for investors currently considering buying the stock, is: can it deliver for shareholders in the future?

A 744% return

On the first day of trading in 1999, AstraZeneca’s shares closed at £29.46. The company had 1,776m shares in issue, meaning its market capitalisation (the value of the whole company) was £52.3bn.

Today (6 April), the share price is £106.20. There are 1,550m shares in issue and the market cap is £164.6bn.

The market cap has increased 215%, but due to the lower number of shares in issue today the share price has increased 260%.

Over the years, AstraZeneca has bought back and cancelled more shares than it’s issued. This shows how share buybacks by successful companies can add value for long-term investors.

Furthermore, AstraZeneca has not only enhanced returns by buying back shares, but also by paying dividends. According to broker AJ Bell, the total return including reinvested dividends works out at 744%.

Patience pays

The journey hasn’t been a smooth one for long-term shareholders. It’s not been a case of the business steadily growing and the share price steadily rising each year.

However, few companies accomplish that feat across a quarter-of-a-century timeframe.

Investors often need patience through difficult periods to reap the full rewards of long-term business success.

Patents and pipeline

When current CEO Pascal Soriot arrived in 2012, the company was in a phase of patent expiries on some of its key blockbuster drugs.

Its 2012 revenue of $28m was down 17%. And there were still big expiry dates to come. Cholesterol drug Crestor and acid reflux treatment Nexium, which together contributed over $10bn of the 2012 revenue, were set to lose US patent protection in 2014 and 2016, respectively.

Furthermore, the company’s late-stage pipeline of new drugs was weak. Soriot made it clear there was no quick fix for the pressure on revenue.

Ultimately though, his strategy to restructure the company, reinvigorate research, and return the business to growth delivered results. The trend of declining revenue reversed decisively in 2019.

Big is no obstacle to bigger

What of the prospects for investors considering the stock today?

The first point I’d make is that just because a company is already very big doesn’t mean it can’t get an awful lot bigger.

AstraZeneca may be a goliath of the FTSE 100, but on the international stage it doesn’t make it into the top five largest companies in the sector. The biggest of them, US-headquartered Eli Lilly, has a current market cap of $746bn — over three-and-a-half times the size of AstraZeneca.

There’s no inherent reason why the UK company can’t grow as big.

Opportune time

Another point for investors to note is that AstraZeneca’s share price is currently lower than its all-time high. That high — £122.94 — was made just under a year ago. The current price of £106.20 represents a discount of 14%.

With no real change to the long-term story, now may be a more opportune time for investors to consider the stock than this time last year.

Risk and reward

An investment in AstraZeneca is not without risks. As seen from the history of the company, patent expiries are a key one. Because of the long lead-time to develop new drugs, it’s essential pharma firms successfully replenish their pipelines on an ongoing basis.

This brings me back to the aforementioned batch of positive announcements on drug trials/regulatory approvals the company issued last week. These are just the latest reflection of what has become consistently strong progress in research and development.

In the company’s annual results, CEO Soriot was able to boast of the firm’s “rich R&D pipeline“, double-digit earnings growth, and guidance for more of the same in 2024.

Prospects beyond that look good too. City analysts have pencilled in continuing double-digit growth in 2025 and 2026. A sustainable future at that level of growth would seem to promise rich rewards for long-term investors.

The post Spotlight on FTSE 100 stock AstraZeneca appeared first on The Twelfth Magpie.

More reading

• 3 UK shares to consider holding in a Stocks and Shares ISA for a decade
• How much would it take to supplement the State Pension up to £20,000 a year through ISA investments?
• 3 FTSE shares experts think will lead the next bull market charge
• 13% annual earnings growth forecast and 44% under ‘fair value! 1 FTSE 100 gem to buy today?

Graham has no position in the stocks mentioned. The Motley Fool UK has recommended Aj Bell Plc and AstraZeneca Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It’s been a while since I wrote about FTSE 100 supermarkets Tesco (positively) and Sainsbury (quite positively).

Right now, for a number of reasons, they’re back on my radar:

• They’re in my calendar of upcoming company results in April.
• Both have upgraded their financial guidance during the course of the year.
• And their valuations are at what I believe to be interesting levels.

Scale

Tesco’s financial year ended on 24 February and its results are scheduled for 10 April.

It remains the UK’s dominant grocer by far, consistently maintaining a market share of 27%-28% in recent years. As such, it has greater advantages of scale than its peers. Scale is often an important ingredient in recipes for superior profit margins.

Its rivals include Sainsbury, of course. Although the orange-liveried supermarket is dwarfed by Tesco, it enjoys some benefits of scale over its other rivals, as it’s the UK’s second-largest grocer with currently a 15.6% share of the market.

Tesco’s guidance

Tesco upgraded its full-year financial guidance in its first-half results. And further raised it when it issued its third-quarter update in early January.

At the start of the year it had guided for underlying retail operating profit of about £2.5bn. It increased this to £2.6bn-£2.7bn at the half-year stage. And then to £2.75bn in the Q3 update.

Similarly, it had guided on retail free cash flow of £1.4bn-£1.8bn at the start of the year. It upped it to £1.8bn-£2bn in the first-half results. And then pinned it at the £2bn top end of the range in the Q3 update.

Valuation

I’ve written about Tesco in the past at share prices of up to 260p. And suggested they merited a price beginning with a ‘3’. They climbed above 300p earlier this year but have since dipped back below. They’re 295p, as I’m writing.

Previously, the market was valuing the stock at around 12 times earnings, with a dividend yield of about 4%.

Despite the shares now being higher at 295p, my sums say management’s upgraded profit guidance translates into earnings growth that makes the earnings valuation no more expensive than previously.

And with the board’s policy of paying out 50% of earnings as dividends, the implied higher dividend means the yield is also as attractive as before.

Free cash flow

The upgrade in free cash flow guidance to around £2bn also strikes me as noteworthy. We’re looking at what could be a third consecutive year of £2bn+.

I think it’s noteworthy, because it represents a consistent outperformance of management’s £1.4bn-£1.8bn target.

At a 295p share price, the yield on £2bn free cash flow is around 9.7%. I view this as great value, being materially higher than what I considered to be an already-appealing 7.7% at the mid-point of the £1.4bn-£1.8bn range.

Tesco’s awesome cash generation only reinforces my belief that a sub-300p share price undervalues this dominant player in an attractively resilient market sector.

Sainsbury’s guidance

Sainsbury’s financial year ended on 2 March and its results are slated for release on 25 April. Like Tesco, it upgraded its financial guidance during the course of the year.

At the outset, it had guided for underlying profit before tax of £640m-£700m, and retail free cash flow of at least £500m.

At the half-year stage, it firmed profit guidance to the upper end of the range, narrowing it to £670m-£700m. And it lifted its guidance on free cash flow to at least £600m.

It reiterated the guidance in its third-quarter update in January.

High yield

Previously writing about Sainsbury in early November 2022, the share price was around 210p and the forecast dividend yield was 5.8%. The dividend was covered comfortably enough by free cash flow, and I saw reasonable prospects of it being maintained for the foreseeable future.

Management’s current guidance implies a payout of 13.1p per share (£310m gross) for a third consecutive year. Again, this would be covered comfortably enough by the guided free cash flow of at least £600m.

Progressive dividend

A current share price of 260p is significantly above that of early November 2022. And because the dividend has remained flat, today’s starting yield of 5% is markedly lower.

However, the company’s free cash flow yield is on a par with Tesco’s 9.7%, and with the board now believing the business can support a ‘progressive’ dividend policy for future years, I remain quite positive on the stock.

The post Why FTSE 100 stocks Tesco and Sainsbury are back on my radar appeared first on The Twelfth Magpie.

More reading

• No longer just a grocer: here’s how a shift in strategy could help Tesco shares hit new highs
• Have Tesco shares got anything more to give?
• Can Tesco shares break through the £5 barrier again?
• Sainsbury’s share price looks 53% undervalued to me, and here’s what the market may be missing…
• Here are the latest dividend and share price forecasts for Tesco

Graham has no position in any of the shares mentioned in this article.  The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Chancellor Jeremy Hunt announced a new ‘British ISA’ in last week’s Spring Budget.

He’s proposing to give investors an additional £5,000 allowance on top of the current £20,000 ISA allowance to invest specifically in the UK market.

I’ll make a few observations on the proposal. And then look at some of the opportunities the market’s offering investors right now.

Patriotic gimmickry

The Chancellor presented the new ISA as part of a package of measures to support British businesses.

In reality, though, unless we’re buying new shares issued by a company in a fundraising (such as a rights issue or placing) our money isn’t flowing into the business. We’re not providing it with any capital to help it grow – by, say, developing new products or expanding into new countries.

For the most part, our £5,000 will go into the pockets of fellow investors who happen to be selling their shares.

As such, the British ISA smacks to me of patriotic gimmickry in an election year. It would have been a lot easier for everyone if the Chancellor had simply increased the existing £20,000 ISA allowance to £25,000.

Waiting game

Another thing to note is that this new ISA hasn’t actually been launched yet. And won’t be any time soon.

There’s a consultation period until 6 June. The government will then need to review the responses and formulate the rules governing which investments will be eligible. And after that, providers will need time to build the new product.

It’s unlikely to be launched before April next year – if it’s launched at all. Ultimately, the Conservatives may not commit to the idea. Or Labour – if they get into power – may ditch it.

Eligibility

At the moment, what would constitute an eligible investment for the British ISA is also an open question.

It looks like all London-listed stocks could be eligible. This would include not only individual operating businesses, but also UK-listed investment companies, such as the venerable City of London Investment Trust.

This trust has served UK investors well for many decades. It has an unrivalled record of having increased its dividend for 57 consecutive years.

Still, there’s some uncertainty about whether it (and others like it) will be eligible. There’s less doubt about the individual stocks in its portfolio.

Footsie companies

To look at what the UK market has to offer in the way of big FTSE 100 names, City of London’s roll of top 10 holdings isn’t a bad place to start.

The table below lists them. And I’ve added columns illustrating the industries they operate in, their current share prices, and my calculations of their valuations on a couple of measures: price-to-earnings (P/E) and dividend yield.

Myriad options

A couple of things in the table strike me immediately.

First, aside from the two companies in the same sector (Shell and BP), the holdings represent a diverse range of industries. And second, there’s a wide variation in their valuations.

At one end we’ve got Relx with a P/E of almost 30 and a yield of just 1.7%. At the other, British American Tobacco with a mid-single-digit P/E and yield of over 10%.

At the end of the day

Value investors and high income seekers will naturally be drawn to stocks with low P/Es and big yields. Conversely, growth investors are always likely to gravitate towards stocks with high P/Es and little or no yield.

Both approaches are capable of delivering healthy returns on investment. And of course, both are capable of disappointing.

In this context, I’d stress that P/Es and dividend yields aren’t the be all and end all of successful investing. Also, that the companies I’ve mentioned are just 10 of literally hundreds listed on the London Stock Exchange.

The proposed new £5,000 British ISA may be a bit gimmicky, and if it does launch it’ll be more restrictive than the existing £20,000 ISA. But at the end of the day, any increase in the amount investors can shield from the taxman surely can’t be a bad thing!

The post FTSE stocks for the new ‘British ISA’ appeared first on The Twelfth Magpie.

More reading

• 3 UK shares to consider holding in a Stocks and Shares ISA for a decade
• Where should value investors look for stocks in June?
• The latest broker outlooks on Greggs shares look wacky, so what’s happening?
• 2 FTSE 100 dividend stocks that stand out for shareholder returns
• Just 9% of us can expect a ‘comfortable’ retirement! Could UK shares be the answer?

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended AstraZeneca Plc, BAE Systems, British American Tobacco P.l.c., HSBC Holdings, RELX, Tesco Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Lloyds Banking Group (LSE: LLOY) has just released its annual results, and investors were able to cheer a 6% rise in its shares on the day.

However, the longer-term performance has been disappointing.

Is the ‘Black Horse’ destined for the knacker’s yard, or is it poised to sprout wings and fly?

Extraordinary

It’s remarkable to think that 15 years ago, in the months after the great financial crisis, Lloyds’ shares traded as high as 73p.

And that 10 years ago, at the time of the company’s 2013 results, they were up to 80p. And went on to reach a post-financial-crisis high of 88p in 2015.

The current price? 46p.

This strikes me as extraordinary, because Lloyds is a much stronger business now than it was 10 years ago.

Then and now

The table below shows some key numbers Lloyds reported in its 2013 and 2023 results.

Investors were paying 80p per share following the release of the above 2013 numbers. They’re paying only 46p per share on the back of the 2023 results.

If I had to pay 80p on the strength of one set of numbers and 46p for the other, I know which one I’d pay 80p for. Suffice to say, it’s not the 2013 set.

Cheap assets

Let me put the topsy-turvy world into even sharper relief by looking at the valuation metrics that can be drawn from the figures in the table.

I’ll begin with price/tangible net asset value (P/TNAV). At the 80p share price of 10 years ago, with TNAV per share standing at 48.5p, investors were buying at a P/TNAV of 1.65. Put another way, they were paying £1.65 for every £1 of Lloyds assets.

Today, at a 46p share price and with TNAV per share at 50.8p, the P/TNAV is 0.9. In other words, £1 of Lloyds assets can now be bought for just 90p — even though they’re generating higher profit, and infinitely superior shareholder returns through dividends and share buybacks.

Gulp, 112p per share

Turning to profit, let’s look at the underlying profit before tax, seeing as Lloyds was loss-making at the statutory bottom-line level in 2013.

10 years ago, the company had 71.4bn shares in issue. So, at the 80p share price, its market capitalisation was £57.1bn — valuing the stock at 9.2 times 2013’s £6.2bn underlying profit before tax.

Today, due to multiple share buybacks in recent years, Lloyds’ share count is down to 64.1bn. At the 46p share price, the market capitalisation is £29.5bn -valuing the stock at just 3.8 times 2023’s £7.8bn underlying profit before tax.

I don’t see any near-term prospect of it, because it would put the P/TNAV too far out of kilter, but if the market were to value Lloyds today at the same 9.2 times profit it was valuing it at a decade ago, the share price would be 112p.

Why? First, because of the higher profit than 10 years ago. And second, because billions of shares have been eliminated from existence through buybacks.

Dividends and buybacks

In 2023, Lloyds’ profitability was such that it generated sufficient surplus capital to distribute dividends of £1.65bn to shareholders (a trailing yield of 5.6% at the current share price) and spend £2bn on buybacks.

City analysts believe the bank can sustainably generate the surplus capital to support such returns. Lloyds has already announced a new £2bn buyback programme for 2024.

It’s important to note that if the annual dividend were to remain static at £1.65bn, the dividend per share would nevertheless increase. The £1.65bn would be distributed among fewer and fewer shares, because of the continual reduction in the share count through buybacks.

Cheap as chips

If Lloyds’ surplus capital generation is indeed sustainable, what would happen if the share price remained at 46p?

The dividend yield would get higher and higher, and the profit and asset valuation metrics cheaper and cheaper. If share buybacks at 46p went on long enough, it could reach the point where one lucky shareholder with one 46p share owned the entire bank!

You can’t even buy a bag of chips for 46p these days!

Sure, it’s a reductio ad absurdum argument, but it illustrates the point that if Lloyds is a sustainable generator of high levels of surplus cash, sooner or later the share price will have to rise to reflect its fundamental value.

The post Lloyds’ shares are cheap as chips! appeared first on The Twelfth Magpie.

More reading

• Are Lloyds shares 23% undervalued?
• How have Lloyds shares become a dividend investor’s dream? 5 reasons why!
• Here’s how much I think Lloyds shares will be worth at the end of 2027
• Lloyds shares look cheap around £1— but are investors overlooking the real story in the stock?
• Will axing this 174-year-old brand boost Lloyds’ share price?

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A couple of company announcements on Friday caught my eye.

Retailer WH Smith (LSE: SMWH) posted a commonplace ‘Trading Statement’. Over-50s travel and insurance specialist Saga (LSE: SAGA) issued a more intriguingly titled ‘Response to Media Coverage’.

The two firms’ share prices moved in opposite directions on the day, but their longer-term charts are remarkably similar. In particular, they’ve declined severely since making post-pandemic highs in the first half of 2021.

Furthermore, they share this similarity with a number of other stocks whose businesses have a feature in common with them.

And I reckon digging into this bunch of unloved stocks could be a profitable exercise for value seekers.

Heavy fallers

Let me start by detailing just how out of favour WH Smith and Saga are.

Smith’s shares made a post-pandemic high of 2,016p in March 2021. They ended Friday 39% below that level at 1,224p. Over the same period, the FTSE 100 rose 13%, meaning WH Smith has underperformed the UK’s top index by 52%.

Saga’s performance has been worse still. Its shares made a post-pandemic high of 456p in June 2021. They closed on Friday at 156p — down 66%. And they’ve underperformed the Footsie by 74%, the index having moved 8% higher over the same timescale.

Growth

There were notable positives in both companies’ updates on Friday.

WH Smith reported a strong performance from its large travel division (74% of group revenue last year). The business enjoyed growth of 16%.

Management highlighted the opening of its largest UK travel store at Birmingham airport, the first of six stores at Budapest airport, and a strong airport store opening programme in North America where it has substantial growth opportunities.

More growth

Similarly, Saga said on Friday that it’s seeing exceptional demand for its boutique ocean cruises and that its ships are operating at close to capacity.

In a further update this week, it said it expects ocean cruise revenue growth for the year of around 30%. And across its entire cruise and travel division (55% of group revenue last year), it sees growth of 40%-45%.

High street and insurance

Of course, WH Smith and Saga both have businesses beside their travel divisions.

WH Smith’s high-street estate is ex-growth and is being tightly managed for its not unattractive cash-generating power. Meanwhile, Saga’s insurance division is currently challenged by a market-wide inflationary environment and declining policy volumes.

My first thought was that these parts of the two companies’ businesses must be holding back investor sentiment, despite the very strong growth in their larger travel divisions.

The market hates travel

And yet when I look at the stock charts of pure-play travel companies, they mirror the charts of WH Smith and Saga.

This is true of SSP Group, a leading operator of restaurants, bars and cafes in travel locations across 36 countries. It’s just released a strong trading update. Cruise ships giant Carnival is another. This one’s recently reported a year of record revenue.

And so it goes on with airlines and package holiday firms, including easyJet, International Consolidated Airlines, Jet2 and On The Beach Group.

It seems the market hates all things travel at the moment. And that could spell o-p-p-o-r-t-u-n-i-t-i-e-s for contrarian value investors.

Pick and choose carefully

I think investors need to pick and choose carefully. The profiles of risk and reward vary from company to company.

Debt is a risk I’m particularly wary about right now. The cost of borrowing was next to nothing for years, but interest rates are now much higher. This makes it more challenging for companies to refinance their borrowings and service their debt.

Which brings me back to Saga and WH Smith.

Uncomfortable versus manageable

Saga’s ‘Response to Media Coverage’ on Friday referred to a Sky News story. This claimed the board is exploring ways to release money from its ocean cruises operation to reduce the company’s large debt pile. It could involve “selling its two flagship vessels or offloading the entire business under a licensing arrangement.”

Saga confirmed it’s ‘exploring opportunities’ and that a ‘partnership arrangement’ is its current preference. There’s no certainty it’ll find a partner, but releasing cash from the cruise business — by one means or another — would certainly help lighten its crushing debt load.

In contrast, WH Smith’s borrowings look very manageable.

So, to reiterate, while I think there could well be opportunities among battered travel stocks, I also think investors need to carefully weigh different levels of risk and reward among the various companies.

The post A bunch of stocks the market hates appeared first on The Twelfth Magpie.

More reading

• Hot, hotter, hottest. Is it too late to consider these 3 amazing FTSE 250 shares?
• £20,000 invested in a Stocks and Shares ISA on 1 January is now worth…

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended On The Beach Group Plc and SSP Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Burberry (LSE: BRBY) announced a trading update last Friday. Uh-oh, I thought, this is bad news.

For one thing, the company had issued a profit warning in its previous trading release. And, for another, Friday’s announcement was a week ahead of schedule.

Under stock exchange rules, a company must notify the market “without delay” of any change that would be “likely to lead to substantial movement” in its share price.

Burberry’s announcement provoked a 14% drop in its shares when the market opened.

What’s going on with this iconic British fashion house and FTSE 100 stalwart?

Profit warnings

In November, Burberry had warned that a “slowdown in luxury demand globally” was impacting trading. It advised that if this continued, its operating profit for the year to 30 March would be towards the lower end of the previously expected range of £552m-£668m.

In Friday’s update, it revealed it had experienced “a further deceleration in our key December trading period.” And that management now expects operating profit to be in the range of £410m-£460m. That’s 17%-26% lower than November’s downgraded guidance.

Yet the shares fell only 14% when the market opened. Furthermore, they rallied to end the day down less than 6%. It seems the market had already largely priced in the risk of a second profit warning.

Not alone

Commentators have pointed out that Burberry’s French and Italian peers have also suffered from weaker demand, and that demand will sooner or later return.

This is true enough, but I think there’s a more fundamental consideration for anyone mulling the prospects and appropriate valuation of Burberry as a long-term investment.

True luxury

You may remember that through the noughties Burberry acquired an unwanted association with Z-list ‘celebs’ and ‘chav culture’. Since then, it’s been intent on moving itself up the hierarchy of the luxury market.

Progress hasn’t been helped by a revolving door on the chief executive’s office and shifts in creative direction. But ascending to the select club of ultra-luxe brands has remained the unchanging dream.

Current chief executive Jonathan Akeroyd, who succeeded Marco Gobetti less than two years ago, told us on his first conference call: “The ambition to be a ‘true luxury’ brand remains absolutely the right strategic positioning for Burberry.”

Work in progress

Akeroyd has refocused Burberry on ‘Britishness’ and ‘Heritage’, and brought in English designer Daniel Lee to replace Riccardo Tisci as the company’s Chief Creative Officer.

Lee unveiled his first collection (autumn/winter 2023) last February, and the “new modern British luxury creative expression for Burberry” is still in the early stages of execution.

As last year’s premiere of the final season of HBO’s hit TV show ‘Succession’ showed, Burberry has work to do to move its brand identity further upmarket.

‘Most offensive bag’

A huge talking point when the season opened was the use of a £2,500 Burberry tote as a signifier of a ludicrous attempt by a gauche outsider to fit in at a gathering of the ultra-wealthy.

Reportedly, the shows creators had tapped sources in New York’s highest social echelon and asked them: “What is the most offensive bag a woman could bring to something like this.“

Online searches for ‘Burberry tote bag’ apparently rocketed, and presumably it sold product on the back of it.

Ultra-luxe, aspirational luxury, affordable luxury? As long as it’s making money, what does it matter to investors where exactly Burberry sits in the market?

Profit margins

Basically, the higher up the luxury pyramid a brand can climb, the higher the profit margins, and the higher the price investors will be willing to pay to own a share of the business.

On an historical five-year view (excluding the anomaly of Covid-ravaged 2020), Burberry’s average annual operating profit margin was 18%. This compares with, for example, luxury multi-brand conglomerate LVMH Moet Hennessy Louis Vuitton at 23% and Hermès at 37%.

The profit margins are reflected in the average price-to-earnings (P/E) multiple investors have been willing to pay for the three stocks over the same period: Burberry (18x), LVMH (28x) and Hermès (52x).

What’s in store?

There’s no guarantee Burberry will successfully move up the luxury hierarchy and achieve the ultra-luxe margins that would merit a re-rating of its shares to a much higher P/E.

Having said that — and notwithstanding the current weak demand across the sector — the depressed shares do look cheap to me, even if it can’t migrate up from its current aspirational luxury positioning and margins.

Indeed, I wouldn’t rule out a takeover bid from a luxury brands group or private equity house.

The post Everyone’s talking about FTSE 100 stock Burberry appeared first on The Twelfth Magpie.

More reading

• 2 FTSE 100 stocks that are undervalued, according to City brokers
• Burberry shares fall after full-year results — is this FTSE 100 turnaround stock finally worth buying?

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Burberry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

There was no white Christmas this year for most of us in the UK.

But we are guaranteed a blizzard in January — a blizzard of Christmas trading updates from FTSE retailers.

A stack of high street names will be reporting on how they fared in what variety goods chain B&M European Value Retail calls ‘the Golden Quarter’.

As ever, we can expect Christmas trading to have firmed up some companies’ confidence in their full-year guidance. And some to lower or raise their expectations.

Let’s have a look at what’s in store.

Selection box

The table below shows just a bellwether selection of the many retailers set to issue trading statements in January.

It includes the dates scheduled for their announcements and the performance of their shares over the last 12 months.



Given the FTSE 100 was up just 3.8% in 2023, and the mid-cap FTSE 250 only marginally higher at 4.4%, it’s no exaggeration to say that most retail stocks absolutely whopped the market.

In demand

The shares of FTSE food sellers generally did well. And I also note that privately owned discount supermarket chains Aldi and Lidl have both already (2 January) briefed the media that they enjoyed their ‘best ever’ Christmases.

The shares of FTSE retailers with a value focus were popular with investors through 2023. Primark owner Associated British Foods (+51%) and B&M (+43%) were notable big risers.

And despite the much-touted ‘cost of living crisis’, investors also piled money into mid-market retailers. Marks and Spencer (+121%) was an outstanding performer, and Next (+40%) was another that attracted strong support.

Out of favour

Investor enthusiasm for retail stocks didn’t extend to sellers of bigger-ticket items and luxury goods.

Currys, the computers, TVs, and kitchen appliances emporium, was one of the two companies in the above table whose shares fell last year. They were down 6%.

DFS Furniture, another seller of bigger-ticket household items, which will also likely issue a trading update in mid-January (it hasn’t confirmed a date), saw its shares slump 21% in 2023.

Luxury fashion house Burberry (-30%) was another casualty. It issued a profit warning in November, citing a “slowdown in luxury demand globally”.

Similarly, investors shunned high-end watches and jewellery retailer Watches of Switzerland (-14%). This one has a trading update pencilled-in for early February.

Common headwinds

Despite positive investor sentiment for food, value and mid-market retail stocks on the one hand, and negative sentiment for bigger-ticket and luxury merchants on the other, there are plenty of common headwinds across the entire retail sector.

In early November, B&M noted that “an uncertain and ever-changing economic background makes forecasting for the full year difficult”.

And M&S itemised a number of the factors in play that are beyond retailers’ control. Namely: “Impact on the consumer of the highest interest rates in 20 years, deflation, geopolitical events, and erratic weather.”

Hyperactivity

With heightened potential for Christmas tales of the unexpected — positive or negative — in January’s flurry of updates, it seems there may be more scope than usual for hyperbolic headline writers and excitable media commentators to ply their trades.

I’ve little doubt there’ll be big ups or downs in the share prices of at least some retailers on their update days. And that short-term traders will revel in their ‘expertise’ when they punt on the stocks that rise, and curse their ‘bad luck’ on those that fall.

Foolish investors

None of the January retail hullabaloo should be of too much concern to level-headed, long-term Foolish investors.

If you already own shares in a retailer, or are thinking of investing in one, its Christmas update may provide some useful new illumination or insight. But in the grand scheme of things, it’s no more than a further small step — forwards or backwards — in the journey of the company.

One short trading period alone will not define the long-term future of the business, or the success (or failure) of your investment.

The post FTSE retail stocks take centre stage appeared first on The Twelfth Magpie.

More reading

• 3 UK shares to consider holding in a Stocks and Shares ISA for a decade
• Where should value investors look for stocks in June?
• The latest broker outlooks on Greggs shares look wacky, so what’s happening?
• 2 FTSE 100 dividend stocks that stand out for shareholder returns
• Just 9% of us can expect a ‘comfortable’ retirement! Could UK shares be the answer?

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Associated British Foods Plc, B&M European Value, Burberry Group Plc, Games Workshop Group Plc, J Sainsbury Plc, Pets At Home Group Plc, and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As we head towards the end of 2023, the FTSE 100 is currently showing a modest gain of 2% since the start of the year.

The trading range has been fairly narrow with a high of +7% and low of -3%.

However, there have been some marked sector themes, and standout performances by individual stocks.

Let’s have a look at the year’s winners and losers. And have a stab at identifying areas of the market that could offer good value going into 2024.

High flyer

Most stocks in the industrials sector have outperformed the Footsie in 2023.

Rolls-Royce is at the top of the list by a wide margin. In fact, it’s not only the biggest winner in the sector, but also the standout performer of the entire FTSE 100. Its shares are up a phenomenal 211%.

New management, contract wins, and business recovery in its large civil aviation division, have all contributed to a big positive shift in market sentiment for the stock.

Jet engine flying hours are a major driver of its revenues. And the post-pandemic recovery in global air travel is doing wonders for the business.

British Airways owner International Consolidated Airlines Group (IAG) is another beneficiary of this. Its shares are up 29%.

Consumer discretionary

At the start of 2023, I advised readers to remember that recessions and high inflation don’t last forever. And that markets begin to re-rate stocks for recovery often well before the recovery actually emerges.

I suggested battered consumer cyclicals (like IAG) represented an area of the market that offered good value for investors going into 2023. Happily, that proved to be the case.

Host of big winners

In addition to IAG, we’ve seen market-trouncing performances by other big players in the travel & leisure sector. For example, Intercontinental Hotels Group (+52%) and Premier Inn owner Whitbread (+39%) both rank in the Footsie’s top 20 risers.

Elsewhere among consumer discretionary stocks, housebuilders Barratt Developments and Taylor Wimpey (both +51%) have been notable strong performers.

Meanwhile, on the high street, a host of retail winners include Primark owner Associated British Foods (+54%), Next (+44%) and JD Sports Fashion (+38%).

Marks & Spencer is the standout retail stock of 2023, and ranks behind only Rolls-Royce on the overall Footsie winners board. A 113% rise in its shares saw it re-enter the UK’s top index in late summer, having previously been demoted to the FTSE 250.

Consumer staples
 

In contrast to the strong performances from many consumer discretionary stocks, market sentiment for the consumer staples sector has been conspicuously weak.

In particular, investors shunned household goods powerhouses Reckitt Benckiser (-2%) and Unilever (-7%), drinks giant Diageo (-20%), and tobacco groups Imperial Brands (-6%) and British American Tobacco (-24%).

It’s rare for the generally resilient — so-called ‘defensive’ — consumer staples sector to underperform when the economic backdrop is challenging. But perhaps the market’s rapacious appetite for cyclicals has had something to do with it.

Defensive winner

Despite a poor year for consumer staples, another famously defensive sector — utilities — has enjoyed a uniformly positive 2023.

British Gas owner Centrica (+50%) is the biggest winner, but all five blue-chip utilities are currently showing market-beating returns.

Other sectors

Commercial property, in the shape of Real Estate Investment Trusts (REITs), is another sector that’s done rather well.

The Footsie’s three current REITs — Land Securities, Segro and Unite — are all boasting gains of between 17% and 21%.

Within other sectors, such as financial services and natural resources, the performance of individual stocks has been distinctly mixed. In fact, the Footsie’s three biggest losers are to be found in these two sectors.

Namely, wealth manager St James’s Place (-33%), gold and silver miner Fresnillo (-34%) and diversified miner Anglo American (-40%).

Looking ahead

I think the recovery of battered consumer cyclicals has probably been the most striking sector theme of 2023.

Obviously, the sector doesn’t offer quite the same value today as it did 12 months ago. However, if the economy has a ‘soft landing’ in 2024 as past multiple interest rises work through the system, these stocks could be in the mere foothills of recovery.

Nevertheless, consumer staples — notably Unilever and Diageo — look more interesting to me today.

With their stables of rare, valuable and trusted global brands, I see them as great businesses for long-term investors. And after underperforming in 2023, I reckon their shares are now on offer at very reasonable prices.

On that note, let me wish you Merry Christmas and prosperous stock picking in 2024.

The post FTSE 100 winners and losers of 2023 appeared first on The Twelfth Magpie.

More reading

• 3 UK shares to consider holding in a Stocks and Shares ISA for a decade
• Where should value investors look for stocks in June?
• The latest broker outlooks on Greggs shares look wacky, so what’s happening?
• 2 FTSE 100 dividend stocks that stand out for shareholder returns
• Just 9% of us can expect a ‘comfortable’ retirement! Could UK shares be the answer?

Graham has no position in any of the shares mentioned in this article. The Motley Fool UK has recommended Associated British Foods Plc, British American Tobacco P.l.c., Diageo Plc, Imperial Brands Plc, InterContinental Hotels Group Plc, Land Securities Group Plc, Reckitt Benckiser Group Plc, Rolls-Royce Plc, Segro Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.