Despite the recent rally, the FTSE 100 is still packed full of cheap shares. Better still, many of them offer whacking great yields too. Based on those criteria alone, the following two stocks look terrific potential buys and worthy of further research. So what else have they got to offer?
The first stock is housebuilder Barratt Developments (LSE: BDEV), which trades at seven times earnings and yields 7.19%. It’s cheap for a good reason. Steadily rising interest rates have squeezed the housing market, hitting both sales and prices, and this is obviously going to show up on the bottom line.
Better times ahead
Housebuilding stocks have been struggling ever since Brexit, when the sector crashed harder than almost any other. It’s right on the front line of UK economic sentiment, which has been pretty negative. Yet lately, Barratt has been picking up, its share price climbing more than 10% over the last month.
It was given a further boost on Thursday (21 September), when the Bank of England surprised everybody by holding base rates at 5.25%. That came as sweet relief for the housing market, as it may ease the burden on buyers. Barratt wasn’t the only housebuilder to jump as a result.
Measured over one year Barratt is up 11.94% but there’s still a long way to go. The BoE could still hike interest rates again, if inflation refuses to come under control (although I’m betting it won’t). The real excitement will come when it starts cutting rates. Sadly, some analysts reckon that might not happen until late in 2024.
As a long-term investor, I’d be happy to buy now and wait until then. Yet I was disappointed to see Barratt recently cut its dividend and kill hopes of a share buyback. With net cash of £1.1bn it’s in no danger, but the recovery will take time.
Doing better than expected
My other ‘7/7’ stock is British American Tobacco (LSE: BATS) which trades at 7.3 times earnings and yields 7.99%. Its share price is down 21% over the last year but it did participate in the recent rally, climbing 8.24% in the last month.
Many see tobacco as a dying market thanks to changing attitudes to smoking, which is a big risk. But like peak oil, we never quite get there. And we’re unlikely to, since big tobacco is finding new ways of giving smokers their nicotine hit, such as vaping.
British American Tobacco set itself a target of generating £5bn of revenues from new-category products such as Vuse and Velo by 2025. That seemed ambitious at the time, but now looks eminently hittable. In the first half of the current financial year, revenues increased 4.4% to £13.44bn with new categories leading the charge.
Tobacco stocks will always be controversial and I don’t buy them myself. Yet they’ve delivered among the most consistent dividends on the FTSE 100 for as long as I’ve been writing about stocks, and that doesn’t look likely to change any time soon.
