I’d buy this UK share in my Stocks and Shares ISA for a long economic downturn
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The outlook for the UK and the global economies remains laden with danger as we head through February. And this means that stock investors like me need to remain extremely careful before splashing the cash. One should certainly not spend any money acquiring UK shares that one can’t afford to lose.
It’s not all doom and gloom, though. I still believe there are many top stocks out there that should deliver decent returns even in these challenging times. H&T Group (LSE: HAT) is one quality UK share I’d happily add to my own Stocks and Shares ISA today.
A UK share for tough times
The twin problems of Covid-19 and Brexit pose significant threats to the domestic economy in 2021 and beyond. These are the sort of unfortunate conditions that play into the hands of counter-cyclical UK shares like H&T.
Data from the Financial Conduct Authority (FCA) shows that the number of citizens that have ‘low financial resilience’ — that means those with too much debt, low savings, or low or erratic earnings — has ballooned due to the Covid-19 crisis. The number of people in this category soared from 10.7m to 14.2m in 2020, the FCA says.
Companies like H&T become most profitable when the broader economic landscape is bleak. This particular UK share offers a broad range of services like pawnbroking, trading precious metals, and doling out loans. And in its most recent trading update last month it said that full-year profits for 2020 would be “ahead of market expectations” thanks to strong business in November and December.
On the flip side…
There is a risk that it might not be all plain sailing for H&T, however. Chief economist of the Bank of England, Andy Haldane, has just predicted a strong rebound for the British economy. With Covid-19 vaccines being rolled out he reckons that “a decisive corner is about to be turned for the economy… with enormous amounts of pent-up financial energy waiting to be released”. Such a scenario would likely have significant adverse effects on the pawnbroking sector.
City forecasts can change according to an improving or deteriorating trading landscape. But today the number crunchers reckon H&T’s earnings will dip 9% in 2021 before soaring 37% next year. This leaves the company trading on a low price-to-earnings (P/E) ratio of 12 times. And for me, a chunky 4% dividend yield puts an extra cherry on the cake.
I don’t think that H&T is just a great buy for the short-to-medium term, though. The business added an extra 70 stores to its estate in 2019 to take the total to 252. And it has described further investment in its online operations as “fundamental”. The UK share’s robust balance sheet (with no debt and a cash balance of £34m at the end of 2020) certainly gives it the resources to keep building for future growth.
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Royston Wild 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.