Why I’d ditch buy-to-let and invest in FTSE 100 dividend stock BAE instead

Peter Stephens — Wed, 20 Feb 2019 12:56:45 +0000

While buy-to-let properties have provided relatively impressive income returns in the past, FTSE 100 shares such as BAE (LSE: BA) may offer higher yields in future. Changes to the taxation of buy-to-let properties, alongside an uncertain outlook for the UK economy, may mean the company’s growing dividends hold greater appeal.

Of course, it’s not the only stock with dividend growth potential. Reporting on Wednesday was a FTSE 250 share with what appears to be a bright income future.

Improving prospects

The company in question is property investment business CLS (LSE: CLI). It announced on Wednesday it has exchanged contracts to acquire a freehold property in London for £53.85m. The property comprises of multi-let office space over seven floors, and is fully let to four tenants with a weighted average unexpired lease term of two years to breaks.

The property is being acquired at a net initial yield of 4.5%, and has a substantial reversionary rental upside to deliver an estimated yield approaching 8% through active management. The company expects to undertake a major refurbishment to deliver high-quality space in an improving area with limited supply.

With CLS having a dividend yield of 2.8%, its income appeal may not be obvious at first glance. However, with dividends per share expected to rise by over 7% per annum during the next two years, the stock could become an increasingly appealing income option. With what seems to be a sound strategy, and the potential for capital growth across the UK commercial property sector, its investing appeal could increase over the coming years.

Total return potential

As mentioned, BAE’s dividend investing potential could be more attractive than buy-to-let. The defence company faces the prospect of rising spending across NATO members, including the US. This could catalyse the wider industry after a period of cutbacks and austerity which have created financial challenges for a number of industry incumbents.

As such, BAE is expected to post a rise in earnings of 6% in the current year, followed by further growth of 8% next year. With the stock having a price-to-earnings growth (PEG) ratio of 1.4, it seems to offer a wide margin of safety. Its balance sheet suggests that it has the capacity to continue to invest heavily in new product development, while geopolitical risks in a variety of regions could mean that the defence industry experiences improving prospects over the medium term.

Certainly, there may be risks facing the world economy which could affect stocks which operate globally. However, with BAE having exposure to a variety of regions, it may offer greater diversification than some of its FTSE 100 peers.

With buy-to-let appearing to lose its appeal after those tax changes and the UK economy having an uncertain outlook, the stock could be a relatively attractive income investing opportunity for the long run.

The post Why I’d ditch buy-to-let and invest in FTSE 100 dividend stock BAE instead appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. 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.

Why the Glencore share price could be set to storm back against the FTSE 100

Peter Stephens — Wed, 15 Aug 2018 11:20:38 +0000

The performance of the Glencore (LSE: GLEN) share price in the last year has been relatively poor. The company has fallen in value by 8% at the same time as the FTSE 100 has risen by around 3%. This underperformance has come at a time when investors have been generally positive towards resources sector shares. As such, it makes the performance of Glencore even more disappointing.

Looking ahead, though, there could be scope for a successful turnaround. However, Glencore is not the only stock which looks cheap and that could outperform the FTSE 100 in the long run.

Solid performance

Reporting on Wednesday was property investment company CLS (LSE: CLI). It has a £1.9bn property portfolio in the UK, France and Germany, with its first-half performance being relatively upbeat. In fact, its net asset value increased by 3% during the period, while earnings per share grew by 15.1% to 6.1p. Net rental growth of 8.7% helped to boost the company’s financial performance, while it recorded valuation gains across all of its regions.

Looking ahead, the company could benefit from a further reduction in the weighted average cost of debt that was achieved during the first half of the year. It is now 2.42% versus a previous figure of 2.51%. And with it having what appears to be a solid track record of growth, its future performance could be relatively resilient.

Despite this, CLS has what appears to be a low valuation. It trades on a price-to-book (P/B) ratio of just 0.9. This indicates that it has a wide margin of safety and may be able to perform well versus the wider index.

Low valuation

Also having a relatively low valuation at the present time is Glencore. Following its share price fall of the last year it now has a price-to-earnings (P/E) ratio of around 9.5. This indicates that it offers a wide margin of safety versus sector peers. And since it has a more diverse business model than many of its industry peers, it could be argued that the stock deserves to trade at a premium.

The recent update by Glencore showed that the company continues to move ahead with its strategy. It is seeking to become increasingly sustainable, so is seeking to reduce debt levels in order to provide it with less risk during more difficult periods for commodity prices. And with the company becoming increasingly efficient, its financial prospects appear to be improving.

With the global economy continuing to grow at a fast pace, the prospects for the company and its sector peers could be positive. Certainly, volatility could be high, with there being the potential for falls in commodity prices. But in the long run, a low valuation and an improving business model suggest that FTSE 100-beating potential is on offer. As such, now could be the right time to buy it.

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