Could economic worries weighing on the economy make now a good time to buy shares? As always, I think it depends on what companies one is looking at. Here are a couple of juicy dividend payers I see as cheap shares to buy now for my portfolio. I regard them as cheap because of their valuation relative to their earnings.
Legal & General
First on my list of cheap shares to buy now for my portfolio is insurer and financial services company Legal & General (LSE: LGEN). The shares offer a yield of 7.3%, so for every £100 I invested in them now I would hope to earn £7.30 in annual dividends.
The business is well-known and in fact that is one of the reasons I like the shares. Its iconic colourful umbrella logo means Legal & General benefits from the awareness of millions of potential customers. It already has a large customer base but I think that could grow in future. The firm has been promoting what it calls “inclusive capitalism”. I think that shows that it is trying to target younger customers, paving a pathway to the future.
There are risks, too. Financial services has become an increasingly crowded sector, which could put pressure on the profit margins of established players like Legal & General. But I think its strong brand, big customer base, and reputation built over centuries all help give it a competitive advantage.
I see Legal & General as cheap based on its price-to-earnings ratio of less than eight. I would happily consider tucking it away in my portfolio for the long term.
Imperial Brands
Another juicy yielder I already hold in my portfolio but would still consider buying now is Imperial Brands (LSE: IMB).
The company is in the business of making and selling tobacco products, under its own brands such as Rizla and John Player Special. That is a very cash generative business. Last year, Imperial’s free cash flow came in at £1.5bn. Those cash flows can help support a beefy dividend. Imperial cut its dividend in 2020 and last year increased it by only 1%. Despite that, the yield is still an attractive 8.5%.
Cheap shares to buy now?
Why did Imperial cut its dividend before – and might it do so again? The higher dividend it used to have looked unsustainable due to the company’s debt and the risk to profits from declining cigarette use in many markets. The company’s net debt fell 16% last year and the 2020 cut means the dividend now eats up less cash than before.
Declining cigarette sales remain a risk, although the company can use the pricing power of its premium brands to try and boost profit margins even if sales fall. No dividend is ever guaranteed, but I think Imperial has been taking steps to try and make its dividend more sustainable than it was a few years ago.
The market already prices in some of these risks and Imperial shares are trading on a P/E ratio below six. At that valuation, I see them as cheap shares to buy now for my portfolio.
