It has been an exciting week on the stock market. The benchmark FTSE 100 index smashed through its previous record to hit a new all-time high.
That may suggest that some shares are now overpriced. In reality, the FTSE 100 is made up of dozens of different companies. While I think some are overpriced, I also see potential bargains I would add to my portfolio, if I had spare money to invest. Here are two of them.
M&G
The fund manager M&G (LSE: MNG) has lost around 8% of its value over the past year.
During that time though, it has raised its annual dividend. That is in line with its stated policy of maintaining or increasing the annual payout. Given that the yield is already north of 9%, that means buying more M&G shares for my portfolio could be a useful boost to my passive income streams.
But valuing the company involves more than just considering its dividends. One risk is that the dividends will not be sustained, for example because stock market nerves lead some investors to withdraw money from the company, hurting profits. Last year, indeed, post-tax profits crashed from £1.1bn to £92m.
I do see lower profits due to customer withdrawals as a risk. But over a longer timeframe I think M&G ought to be able to ride the cycle of customer demand. It has deep experience, a large customer base and a well-recognised brand that can help it attract and retain business. I expect demand for financial services to remain high and this FTSE 100 firm is well-positioned to benefit from that.
British American Tobacco
The Lucky Strike cigarette brand maker British American Tobacco (LSE: BATS) has seen its share price fall 7% over the past year. That means it now trades on a price-to-earnings ratio of around 10. I see that as cheap for a business of its quality.
As its final results yesterday showed, revenue last year grew 7.7% compared to the prior year.
The firm remains a cash generation machine. Last year, British American generated net cash from operations of £10.3bn. That helps fund a generous dividend. The annual payout was increased yet again, this time by 6%. So at its current share price, the British American Tobacco dividend yield is 7.2%.
From an income perspective, that is attractive to me. But tobacco is a declining market. British American expects the worldwide industry to see 2% smaller volumes this year than last. That could hurt both sales and profits at the firm. Its adjusted net debt of £38bn also poses a risk to dividends, as servicing it will eat up a lot of cash.
The company is building its non-cigarette business at speed and now expects it to turn a profit next year. The FTSE 100 heavyweight expects to generate a massive £40bn of free cash flows (before dividends) over the next five years.
That could fund a lot of shareholder payouts! I’ll be happy to receive them.
