2 FTSE 100 dividend stocks I’d buy in May

Roland Head highlights two stocks with the potential for long-term income growth.

| 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.

Sales fell by 12% to $5,405m during the first quarter at pharmaceutical giant AstraZeneca (LSE: AZN). But shareholders are focused on the long-term potential of the group’s pipeline, which has been rejuvenated since chief executive Pascal Soriot took charge in October 2012.

Mr Soriot has previously promised that 2017 could be a defining year and recent news on new product development has started to provide some support for this claim.

In recent weeks, AstraZeneca has received full approvals in the US and Europe for its Tagrisso lung cancer medicine and has also launched the product in China. Sales of the group’s Lynparza medicine for ovarian and breast cancer rose by 30% to $57m during the quarter and have generated “positive data” so far.

New products like these form the basis of AstraZeneca’s valuation, which is very much based on the expected future value of its pipeline. I suspect this long-term view will pay off for patient shareholders.

Is it safe to wait?

AstraZeneca’s reported operating profit fell by 12% to $917m during the first quarter, due mainly to a loss of patent protection for the group’s Crestor medicine. Mr Soriot expects performance to stabilise during the second half of the year, but AstraZeneca’s core earnings per share are still expected to fall by “a low to mid-teens percentage” in 2017.

Buying a stock in the hope that future trading performance will improve always carries some risk. But opportunities such as these can be very profitable. In this case, I think it’s credible to believe that AstraZeneca will deliver significant growth from new products over the coming years.

For long-term investors, I think AstraZeneca’s forecast P/E of 16 and 4.5% dividend yield remain a decent entry point to this business.

Is this stock about to bounce back?

Shares of engineering support services company Babcock International Group (LSE: BAB) are down by 38% from their 2014 peak of nearly 1,500p. But the group’s performance has held up better than many of its outsourcing peers over the last couple of years.

There are several reasons for this. But in my view, the main advantages Babcock holds are that much of its work is highly skilled and in the public sector, principally defence. The barriers to entry for potential competitors are much higher than they are for security guards or cleaners, for example.

I’m beginning to think that Babcock stock could offer a buying opportunity for contrarian investors. The group’s third-quarter statement confirmed that full-year results ended on 31 March should be in line with expectations.

That puts Babcock on a forecast P/E of 11.5, falling to a P/E of 10.7 in 2017/18. The group’s dividend is expected to rise by 8% to 27.9p for 2016/17, giving a forecast yield of 3.0%. Although this is slightly below the FTSE 100 average, Babcock’s dividend has risen every year since at least 1998, so it could be worth accepting a slightly lower yield.

The group’s full-year results are due on 24 May, so we’ll learn more then. But in my view, Babcock International could be worth considering as a long-term buy.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »