Why I’d Still Buy BP plc, Hold Reckitt Benckiser Group Plc & Dump Vodafone Group plc Right Now!

BP plc (LON:BP), Reckitt Benckiser Group Plc (LON:RB) and Vodafone Group plc (LON:VOD) are under the spotlight.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BP (LSE: BP) is rallying hard, with its stock trading at six-month highs, and I think it may hit 500p sooner than I expected. It looks like traders and brokers are reconsidering their short-term projections on oil prices, but there’s more to it: BP could easily trade at 600p a share by early 2016. 

Elsewhere in the consumer space, Reckitt‘s (LSE: RB) rally seems unstoppable (up 18% in 2015) — but should you reduce exposure if you are invested?

There’s no easy answer, I’m afraid, and your decision may depend on the speed at which interest rates rise in the West. Take it easy, you have plenty of time. To push the stock higher — say, to 6,600p a share, for an implied 10% upside from its current level — management may come up with the idea of offering a higher yield to shareholders via a special dividend, according to market rumours. That’s something you may want to bet on, in my view. 

Something you may want to avoid, however, is exposure to Vodafone (LSE: VOD)! Although I keep looking for reasons to invest in it, I can’t find any at the present time… and if you are invested, then you may have a good chance now to sell ahead of its full-year results, which are due on 19 May.

Are Oil And BP The Best Bet Of All? 

Fundamentals, global macroeconomic trends, oil prices as well as the relative valuation of BP stock over the last 20 years suggest you should have acquired the company at 400p a share in the last six months, but there’s still time to invest in it at 480p — although its higher risk profile could dilute your returns.

The reason why BP (up 15% in 2015) is one of my favourite picks in the market is not that BP is a takeover target — which is a concrete option, at least according to traders who have build long positions in BP following Shell’s £47bn offer for BG. Time and again — barring the Deepwater Horizon spill in 2010 — BP has proved to be good at managing expectations, and this time around in particular, with fast-falling oil prices, it seems to have swiftly reacted to a fast-changing economic landscape.

I like that, and I like its balance sheet and its cash flow profile more than its profit and loss statement, which are good enough reasons to consider BP ahead of first-quarter results, which are due on 28 April.

The annual general meeting is taking place today, 16 April, and management will have to give some straight answers to shareholders at a time when sector consolidation is on the cards. 

Is A Special Dividend Coming At Reckitt? And How About Vodafone’s Yield? 

It looks like Reckitt may be about to focus on yield (forward yield 2.1%) now that it is cutting costs to preserve margins and net earnings, which means that it could spend some of its cash pile to boost the all-in returns of its shareholders — its free cash flow yield is as high as 4.4%.

First-quarter results are due on 24 April. A special dividend would not be tax-efficient, but would make more sense than additional stock buybacks, and would likely be welcomed by investors as it would open a more generous payout policy into 2016 and beyond. A higher dividend could be easily financed either by Reckitt’s excess of cash or mildly higher leverage.

Talking of market-beating yield, I think Vodafone’s 5% forward yield will have to come down at some point — I don’t fancy its core cash flow profile.

Full-year results are due on 19 May, and I wouldn’t buy the shares (up 3% this year) ahead of results, which will likely show little value in Vodafone’s current strategy — earnings multiples are not particularly reliable, but its paltry valuation is reflected in its adjusted core cash flow multiples for 2015 and 2o16, which stand at around 7x. Debt must fall, and the sooner the better.

My suggested price target, also based on the fair value of its assets and write-down risk, is 200p a share into the third quarter, for an implied 12% downside. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

£20,000 tucked away? Here’s how I’d aim for a £29,664-a-year passive income

This Fool wants to debunk the myth that making passive income is impossible. With £20,000, here's how he'd do it.

Read more »

Dividend Shares

Starting with £0, here’s how I’d turn my Stocks and Shares ISA into a second income machine

Jon Smith explains how compounding his dividend payments can help him to grow his Stocks and Shares ISA from a…

Read more »

Happy parents playing with little kids riding in box
Investing Articles

A 9.7%-yielding FTSE 100 dividend gem that could create generational wealth

A sizeable investment pot that can be passed onto the next generation could be built with much smaller investments over…

Read more »

Investing Articles

Up 31%, do Lloyds shares have more to give?

Shares in major FTSE 100 bank Lloyds are on a charge. But what could be in store for the stock?…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Time to sell this FTSE 100 underperformer, says Goldman Sachs

Analysts at one investment bank have a ‘sell’ rating on FTSE 100 stock Diageo. But could a short-term weakness in…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Down 5%, Glencore’s share price looks a serious bargain to me now

Glencore’s share price looks undervalued to me, supported by strong earnings growth prospects and the potential resumption of extra shareholder…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’d invest £6,580 in this FTSE 250 REIT for £500 passive income

This FTSE 250 renewable energy enterprise is on track to become a Dividend Aristocrat! Here’s how I’d invest to earn…

Read more »

Investing Articles

Buying 1,000 of some dividend shares today unlocks £45 in weekly passive income!

These shares are among the biggest dividend payers in the FTSE 100. Should investors be buying them now to earn…

Read more »