Why I’d buy this flying FTSE 100 stock today and hold it for decades

This FTSE 100 (INDEXFTSE:UKX) business has outstanding credentials for buy-and-hold investors, says G A Chester.

| 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.

A bull outlined against a field

Image source: Getty Images.

The Smith & Nephew (LSE: SN) share price jumped as much as 8% higher in early trading today after the medical technology giant issued a positive Q3 trading update. The company said that while it now expects underlying revenue growth for the full year to be in the lower half of its 2% to 3% range, it anticipates a trading profit margin above that achieved in 2017, as a result of a favourable legal settlement and improved cost control.

I’ll come back shortly to why I’d be happy to buy this FTSE 100 stock today and hold it for the long term, but first I want to tell you about a smaller company in the healthcare sector. This firm’s share price is well over 50% below its high of last year but I believe it could be on the verge of a major recovery.

Regaining momentum

Vectura(LSE: VEC) is an industry-leading designer of medical devices that enhance the delivery and performance of inhaled products to help patients suffering from airways diseases. It also develops high-quality generic alternatives to branded therapies.

The company experienced a challenging 2017 and the decline in its share price saw it demoted from the mid-cap FTSE 250 index to the SmallCap index. However, having refocused its portfolio prioritisation and implemented initiatives to transform R&D productivity, the business has been regaining momentum recently.

Looking to next year’s earnings — a consensus forecast increase of over 40% to 4.8p a share, according to Reuters — I reckon there’s considerable upside potential for investors today at a share price of 72p (market cap £479m). I’d be happy to buy this stock for its recovery prospects.

Unlocking growth potential

Smith & Nephew, which last month was named by my colleague Kevin Godbold as his top stock to buy, is a bigger, more stable business than Vectura, with a market cap of £11.8bn at a current share price of 1,350p. For this reason, and because ageing populations and more active retirees provide long-term rising demand for many of its products, it is a stock I believe can thrive for decades to come.

Current chief executive Namal Nawana arrived in the summer with a track record of energising businesses to deliver better performance and greater value to shareholders. He’s confident he can do this at Smith & Nephew, with what he describes as the group’s “excellent product portfolio with numerous best-in-class medical technologies.”

We should get full details of his strategic plans early next year, but today’s update told us of one major change already being implemented, which is aimed at unlocking the firm’s growth potential. This is a new global commercial model, including a president responsible for each of the company’s three specialised global marketing franchises: Orthopaedics, Sports Medicine/ENT and Wound.

Discount to peers

The current share price represents 18.5 times this year’s forecast earnings of $0.94 a share (72.9p at current exchange rates) and 17.4 times next year’s pencilled in $1.00 (77.5p). The earnings rating and a modest 2% running yield on a $0.35 (27.1p) dividend put Smith & Nephew on a premium rating versus the FTSE 100 average.

However, I see the shares as a ‘buy’ because the company looks great value against its own sector peers. Indeed, in a research note this morning, analysts at Exane said the stock is trading at a 10-year high discount of 20% against US peer Stryker.

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 considered so you should consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Woman using laptop and working from home
Investing Articles

2 top stocks to buy with dividends yielding more than 3%

When I’m looking for stocks to buy, big dividends can be attractive. On my radar right now is a FTSE…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

2 FTSE 250 high-dividend stocks I’d buy for passive income!

Buying shares with above-average dividend yields can have a spectacular effect on long-term passive income. Here are two high-dividend stocks…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Should I buy this dirt-cheap penny stock for growth and returns?

This Fool delves deeper into a penny stock that could be primed to grow and provide lucrative returns in the…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

3 points I’ve learned from Warren Buffett’s whopping $43.8bn loss

Jon Smith shares some of his takeaways after seeing the Q2 reported loss for Warren Buffett's company, Berkshire Hathaway.

Read more »

Happy couple showing relief at news
Investing Articles

The Aviva share price is climbing. Here’s why I’d buy more

After what seems like years of going nowhere, the Aviva share price is finally showing signs of life. I take…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

This is one of the best shares to buy for juicy dividends!

Jabran Khan is hunting for the best shares to buy. This commodities business offers an enticing dividend yield to boost…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Can I trust Rio Tinto’s 10.3% dividend yield?

Rio Tinto offers one of the biggest dividend yields on the FTSE 100 today. But does this make it a…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Lithium prices skyrocket: 2 UK shares I’d buy to capitalise 

Lithium has quickly become the most in-demand metal in 2022. I am looking at two UK shares in the EV…

Read more »