After another session on Tuesday that left investors in the FTSE 100 licking their wounds, it is easy for opportunities to be missed as investors and prospective investors alike wait for the volatility to subside.
The most recent bout of volatility with sharp falls across the world seems to have been brought about due to investors’ renewed concern about the health of the global economy after the US Federal Reserve decided to leave American interest rates on hold on Thursday, given the fragile nature of the recovery.
Whilst not a racing cert, I believe that it is fair to assume that this means that UK rates will not rise for some time yet, causing yet more misery for those who need to extract an income from their savings.
So it is interesting to see that the market seems to be throwing up some interesting opportunities. The chart below shows the FTSE 100, along with three blue-chip dividend stars: SSE (LSE: SSE); HSBC (LSE: HSBA) and Vodafone (LSE: VOD).
As we can see, all three shares have broadly tracked the FTSE 100 over the last three months and, importantly, all three companies yield well over 5% — let’s take a closer look at each company in turn:
SSE – A Clear Dividend Strategy
Currently the 68th biggest company on the blue-chip index, SSE is a United Kingdom-based company engaged in the generation, transmission, distribution and supply of electricity; in the production, storage, distribution and supply of gas; and in other energy-related services.
When the company last updated the market in July, it confirmed that it is continuing to target an increase in the full-year dividend for 2015/16 of at least RPI inflation, with annual increases thereafter of at least RPI inflation also being targeted.
At current prices, that means the shares are currently expected to yield 6.38% on a 12-month forecast rolling basis. Importantly, the dividend should be more than covered by earnings, which should give some comfort to investors.
Whilst it is clear that the industry is competitive and needs to become greener, the company can borrow fairly cheaply and invest where it needs to. Accordingly, I think that the dividend is safe.
Banking on HSBC
Next up — the global bank, HSBC, the 9th biggest company in the UK by market cap. I don’t like big banks these days, but it would be foolish to turn one’s nose up with a share trading below its tangible book value, on a forward P/E of less than 10 and yielding nearly 7%.
It’s fair to say that a decent amount of the share price weakness that has seen the shares trade down for the last 12 months or so is down to concerns surrounding China, and to a lesser degree the bank’s decision to exit from countries such as Brazil and Turkey.
Couple these with the strategic review that will mean that thousands of employees will be looking for alternative employment, a reduced return on equity target of greater than 10% — less than the previously targeted 12-15% and the possibility of an alternative headquarters, given the punitive banking levy currently being levied.
However, with unloved shares, investors can often find opportunities, and HSBC is starting to look very interesting.
Dial up 5%+ with Vodafone
With a forward P/E of around 38 times forecast earnings, it’s hard to see how Vodafone looks like a reasonably priced value play.
However, utility-like characteristics and the fact that the company currently trades below its reported book value should give some support to the share price – at these prices, the shares yield in excess of 5%.
On dividend growth, the company says:
“Although cash flow will continue to be depressed in the coming year given the high levels of investment, our intention to continue to grow dividends per share annually demonstrates our confidence in strong future cash flow generation.”
I think long-term investors should start to see the rewards of the capital investments going forward, and there is always the added potential that Liberty Global with return with a new, improved plan, which should give the shares a welcome boost. However, you should never invest on the basis of a merger or takeover alone.
