Many UK shares have thrived throughout 2024, some even delivering triple-digit returns. However, not all businesses have been so fortunate. Despite their popularity, these two stocks seem to have fallen into some hot water recently. I don’t hold shares in either and I think investors should be cautious too if they’re considering them for their portfolios.
Excitement surrounding homebuilders
One of the big promises from the newly elected Labour government is to simplify the planning permission process for building residential homes. Pairing this with falling mortgage rates and rising house prices, homebuilders like Persimmon (LSE:PSN) seem to be on track for some much-improved performance as we move into 2025.
Evidence of this is already starting to appear in the firm’s results. As per its latest third-quarter results, management reiterated its target of delivering 10,500 homes by the end of 2024 versus the 9,922 delivered in 2023. And if this upward momentum continues, the group might soon be back to completing close to 15,000 a year.
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However, the UK has long struggled when it comes to homebuilding targets. And looking at the latest data from the S&P Global UK Construction PMI, British homebuilding’s once again in contraction.
To date, Persimmon’s completed 5,861 homes since the start of the year. This means it needs to complete another 4,639 to hit its target. Historically, the fourth quarter has always been Persimmon’s most productive period. But that leaves little room for error if it wants to hit its goal, especially since it’s a 10% boost compared to 2023.
Any unexpected delays or material shortages could result in shareholders being disappointed. And with the UK still tackling a shortage of skilled tradesmen to actually build the houses, the entire sector’s long-term potential continues to be handicapped, even if planning permission’s easier to obtain.
The future of tobacco
Tobacco enterprises aren’t for everyone. Ignoring the moral ambiguity of investing in these businesses, companies like British American Tobacco (LSE:BATS) are operating in an increasingly hostile regulatory environment. Despite this, management’s continued to expand shareholder payouts. And even today, the stock continues to offer a terrific 8% yield, even after shares climbed almost 30% in 2024.
Today, there are an estimated 1.25 billion smokers worldwide, according to the World Health Organisation. And the general consensus is that this number will drop over time. After all, the smoking rate’s been steadily declining over the last 20 years. However, when factoring in population growth, analysts at Panmure Liberum have estimated the total number of smokers to fall only to 1.2 billion by 2050.
It sounds like these UK tobacco shares have plenty of longevity. But personally, I’m becoming increasingly less convinced. Around 80% of the smoking population live in low- and middle-income countries outside the US, UK, and Europe. Yet 80% of British American’s revenue comes from these richer countries, which is also where tobacco regulation is becoming increasingly strict.
No doubt that’s why management’s been aggressively investing in alternative products such as vapes. However, the growth of these products is starting to wobble as competition in this new market skyrockets.
For the time being, British American seems to be holding firm and generating the needed cash flows to maintain dividends. But the battle’s seemingly becoming harder. And if its foray into the tobacco alternative market fails, its status as a Dividend Aristocrat could soon be over.
