Today I’ll be taking a closer look at oil supermajor BP (LSE: BP), consumer goods giant Unilever (LSE:ULVR), and banking group The Royal Bank of Scotland (LSE: RBS). Should you be risking your money on these FTSE 100 firms?
Beaten-down bank
The Royal Bank of Scotland has no doubt seen its fair share of problems in recent years, along with others in the troubled banking sector, and they have certainly been punished by the market. The shares were changing hands at around £60 in 2007, and are now trading at just over £2, so surely the worst is over?
Unfortunately not. Analysts are talking about another poor year, with a 39% fall in earnings expected in 2016, before a 22% recovery next year. This would leave the shares trading on twelve times forecast earnings for this year, falling to just ten for the year ending December 2017. I think the shares are still suffering from poor investor sentiment and now could be a good time to take advantage of the low valuation.
Safe haven
Consumer goods giant Unilever has seen its shares outperform the market this year. They’ve risen more than 10% compared to the wider FTSE 100 index, which is stuck at the same level as a year ago. This is impressive from a defensive low-risk firm like Unilever, which is certainly not a classic growth stock.
At current levels the shares are not cheap, trading on a forward price-to-earnings ratio of 21 for this year, falling to 20 for 2017, with dividend yields forecast at 3.2% and 3.4% for the next couple of years. The premium valuation reflects the company’s defensive qualities and attractions remain for investors looking for stability at the heart of a balanced portfolio.
Unpredictable
Multinational oil company BP recently reported a first quarter loss of $583m, compared to a $2.6bn profit a year earlier, but this loss was an improvement on the $3.3bn loss in the last quarter of 2015. Full-year earnings are expected to remain flat this year at around £2.2bn, but predicted to double to £4.9bn next year. Great news, but what about the valuation?
BP trades on an expensive-looking 30 times forecast earnings for this year, falling to a more reasonable 14 times for next year. But this P/E rating will only be achieved after the predicted 119% earnings growth, so not much margin for error, and hence pretty risky in my book.
The verdict
RBS shares look like a bargain at the moment trading on very low earnings multiples for this year and next. Bargain hunters who don’t mind taking a contrarian approach might want to go against market sentiment and grab a slice of this banking giant at a rock-bottom price.
Unilever continues to offer a safe haven for risk averse investors happy with slow-but-steady growth and a progressive dividend. This is a great buy-and-forget stock for nervous investors wanting to sleep at night.
BP could remain volatile for quite some time with the uncertain outlook for the oil price. Despite plunging this year, the shares are not cheap, and there will be a risk of dividend cuts in the future without a significant rise in the oil price. I feel the shares are still too risky, and would suggest keen investors drip-feed into the stock over the long-term to compensate for volatility, rather than going all-in now.
