Great margins, high dividends, low debt: Are these Footsie shares the best buys on the market?

Can these three shares continue to be investor darlings for years to come?

| 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.

You only have to glance at the financial results for Domino’s Pizza (LSE: DOM) to understand the appeal of a franchisee business model. Interim results through the end of June saw sales up 17% year-on-year and operating margins improving to an astounding 23%, leading to a full 22.7% jump in post-tax profits.

And this growth isn’t just coming from new store openings as the period saw a 10.9% improvement in like-for-like sales as improved digital offerings tempted people into ordering more pizzas.

Although the company’s net debt rose to £10.9m, this was due to a £46.6m investment in Nordic Domino’s franchises and is well within the company’s 1.25 times EBITDA leverage range.

High growth and a healthy balance sheet allowed the company to increase interim dividends by 16.7% and analysts are forecasting shares to yield 2.2% this year. Although the shares are highly valued at 27 times forward earnings, great growth prospects, growing dividends and fantastic margins lead me to believe the shares could live up to high expectations.

And now for something completely different

Selling £1,000 handbags is unsurprisingly a high-margin business for luxury brand Burberry (LSE: BRBY). Although underlying operating margins are under pressure due to faltering sales in China and rising costs, they were still very high for a retailer at 15.4% last year.

That said, despite solid profitability the company can’t escape the continued trouble in China. A crackdown on graft and conspicuous consumption by the Communist Party combined with a slowing economy once again led to double-digit declines in same store sales in Burberry’s Hong Kong locations, where many Mainlanders shop to take advantage of lower luxury taxes.

The Chinese market will turn around eventually though, and Burberry remains well positioned to survive this downturn. The company had net cash of £660m at the end of March and worldwide revenue remained level year-on-year in Q1. With dividends growing and expected to yield 2.8% this year, continued profitability and a forward P/E ratio down to its lowest level in years, now could be a great time for contrarian investors to take a closer look at Burberry.

Cheap fares, cheap shares?

Valuations in the FTSE 100 don’t come much lower than the 10.3 forward P/E that shares of EasyJet (LSE: EZJ) now trade at. The current share price also means dividends will yield around 4.8% this year, so why in the world are shares so cheap?

Investors are rightly worried that any Brexit-induced economic slowdown will lead to fewer holidays abroad for UK consumers. As the UK’s largest budget carrier, this is no empty threat for EasyJet.

There’s also the fact that years of rapid growth for the budget sector as a whole are leading to the age old problem for airlines: overcapacity. This is a valid worry as industry watchers were forecasting a slowdown in seat demand even before Brexit.

The question then becomes whether EasyJet can survive any slowdown. With net cash at the end of Q3 at £368m, there are few worries concerning the balance sheet.

However, the company did post a £24m loss in the six months through March, a far cry from the solid 14.6% pre-tax margins posted last year. Shares may look like a bargain now but with fare wars heating up amid slowing demand, EasyJet’s time in the sun may be over for the time being.

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.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Burberry and Domino's Pizza. 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 Caucasian man making doubtful face at camera
Investing Articles

When will Shein hit the UK stock market and should I invest?

With Shein looking likely to list on the London stock market in 2024, this writer weighs up the case for…

Read more »

Investing Articles

Start supercharging passive income with REITs!

Are REITs the ultimate investment for boosting income generated from a portfolio? Zaven Boyrazian explores some of the most lucrative…

Read more »

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »