My uncle advised me to focus on war, sex, drugs, and rock ‘n’ roll if I wanted money. The reason was that these industries were expert in generating it. BAE Systems (LSE:BA) is in the war section, so it’s a big tick on behalf of my uncle. The company is the largest defence contractor in Europe. If I’d invested in BAE Systems shares just three years ago, I would have doubled my money. There are not many stocks I can say that for.

Funnily enough, it’s not just within the last three years that I’d have been generously rewarded. Whether I invested last year (30%) or 10 years ago (260%), I would have deemed it a worthwhile pursuit.

I invest to make money. BAE Systems certainly seems a suitable investment based on its historical total returns. But let me dig underneath the bonnet and assess a key metric for my investment — its profitability.

Rising profitability

The best gauge of profitability for me is Return on Capital Employed (ROCE). This assesses how well a company is generating profits from capital it has put to use.

From my perspective, it’s a reassuringly stable picture. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 10%. I consider this a standard return. But positively, BAE Systems has consistently earned this amount. If this level of return can be maintained over the long run, I think it’s a nice reward to shareholders.

Of course, historical returns are no indicator of the future. Therefore, I need a firmer grasp of the company’s outlook, and it’s a mixed picture.

Outlook

Its dividend is low compared to other aerospace and defence companies. Meanwhile, its annual earnings are forecast to grow slower than the British stock market.

However, I need to weigh this against some positive tailwinds into the future. Despite the risk of anaemic earnings growth, its revenue growth is expected to outpace the UK market as a whole.

Additionally, I think the stock looks cheap based on its price-to-earnings valuation. This suggests there could be upside in store for the share price.

Secondly, the company makes most of its money in the US, where it has huge manufacturing plants. The strong US dollar has made it cheaper to import the key metals the company uses. Simultaneously, the robust dollar means that the firm benefits from foreign exchange trends.

So, in the medium term, I foresee cheaper production costs and greater demand. The combination of these factors is bound to rub off on the company’s share price. City analysts have already forecast a 20% rise in its valuation this year.

A repeat performance

I repeat, historical performance is no indicator of the future. But clearly, for the last three, five, and 10 years, BAE Systems has demonstrated a strong track record of delivering double-digit total returns.

If I’d invested £5,000 in this stock just three years ago, I’d have received over £10,000 and some change.

Can the trick be replicated after the next three years? It’s a mixed picture. I’d require more future guidance from the company and its business outlook.

If management foresees a benign environment, it’s likely I’ll be purchasing some shares.

The post If I’d invested in BAE Systems shares 3 years ago, here’s how much I’d have now! appeared first on The Motley Fool UK.

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Henry Adefope 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.

A lifetime of passive income

As I still have (hopefully) more years in the tank than I’ve lived, I often opt for growth investments. But life has become more expensive. Thus, my dependency on my portfolio to generate additional income has grown.

Dividend stocks and equity income funds specialise in distributing regular income to investors. But the yields can be volatile depending on the economic environment.

So, for a durable and consistent second income, I could look no further than dividend heroes. These stocks exist to provide a lifetime of growing income for shareholders.

Take the City of London Investment Trust. It has been paying and growing dividends consistently for 56 years. I’m 33 years old, so generating income for longer than I’ve been around is impressive in my book.  

Fledging ‘second income’ heroes

Officially, dividend heroes are stocks that have historically increased dividends every year for at least 25 consecutive years. But rather than just investing in one of many established dividend heroes, I’m hunting down those that could turn into the next generation of stars, especially among investment trusts. The up-and-comers list is a specific grouping, overseen by the Association of Investment Companies (AIC). It covers trusts that have increased dividends for at least 10 years, but less than 20. There’s no guarantee these trusts will make it to dividend hero status, but all are well on their way.

My eyes are on the Henderson High Income Trust (LSE:HHI). This does exactly what it says on the tin. It invests in quality companies, both large and small, to deliver high dividend income and capital growth. It has consistently raised its dividends each year for the last decade. Within this period, it has wildly outperformed its benchmarks. It has a 6% dividend yield. This is already high — and to think it could continue to grow for the next 40 years at least certainly whets my appetite.

However, by purchasing some of its stock, I’d face higher charges than with its peers. In addition, the portfolio has a high level of borrowing. With interest rates higher than usual, the portfolio could be under pressure. Higher gearing also implies amplified losses for the underlying portfolio if things turn sour.

Investing on the side

Side hustles are admirable, but I’m after something that takes up less of my time.

Henderson High Income Trust is some way away from dividend hero status. It has another 15 years of growing dividends to reach this mark.

Nevertheless, I think this trust has the makings of a second income that can grow and last a lifetime.  I just need to do more digging to ensure this is the most suitable lifetime commitment for me. Did I mention earlier that I was due to get married?

The post A second income for life? This fledgling dividend hero could be my saviour appeared first on The Motley Fool UK.

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Henry Adefope 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.

It was only a short while ago that the FTSE 100 was hitting record highs. Now suddenly, the magical 8,000 mark seems a distant dream.

A cheaper main market

Funnily enough, a strong stock market can make investors nervous. So, a falling market, psychologically speaking, is when I like to invest, particularly when the index still looks relatively cheap.

According to Ben Laidler, Global Markets Strategist at eToro, it is cheap. He believes “the mix of low valuations (40% P/E discount compared to the S&P 500), high dividends, and a sector mix of commodities, banks and staples, is attracting investors”.

Fascinatingly, eToro’s platform data shows that more UK retail investors are buying FTSE 100 companies this year relative to the last. The proportion holding at least one FTSE 100 stock has risen 11%, while those holding at least five shares is up 17%.

Laidler attributes the growth in part to DIY investors like me “taking advantage of the lower prices and valuations of the recent correction”.

Clearly, I am not alone in snooping around for a FTSE 100 bargain. But with the index edging lower, and inflation and rates higher, should I really be investing now?

Time in the market beats timing

Yes, is the short answer. Research from Princeton University shows that if I stay invested over the long run in a well-diversified portfolio, I’ll receive better returns than trying to profit from turning points in the market. The research is essentially saying it’s a bad idea for me to time the stock market.

Ideally, I would wait for the current FTSE 100 correction to bottom out. Then invest all my money and ride all the way laughing to the top of the next peak. However, as the research suggests, identifying market bottoms or tops is virtually impossible.

This is where the pound cost averaging is most relevant. It’s a way my portfolio can benefit from the market’s ups and downs, without me having to time anything.

Put simply, if I had £1,200 to invest this year, I would make more money investing £100 a month than trying to time the market and invest the lump sum at a certain point. If the market is falling, it’s even better for me. I would be buying in at a lower price each time and thereby reduce my average cost.

Long-term gains

So, it is clear as day to me that investing periodically, even when markets are falling, can enhance my future return.

Falling markets don’t scare me. They make me want to invest. With the new tax year’s ISA allowance about to kick in, it’s a great time to load up on some tax-free FTSE 100 bargains.

The big secret regarding equity markets, is that they tend to grow over the long term. For decades, that’s primarily what they’ve done — with plenty of falls and crashes along the way.

So, of course it’s the right time for me to be investing in the FTSE 100. As long as I do it on a systematic basis. This way I’ll never be fussed about whether markets are falling or rising, and benefit either way.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post Is now a good time to invest in the FTSE 100? appeared first on The Motley Fool UK.

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Views expressed 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.

Top FTSE 100 banking stocks including Barclays (LSE:BARC) and HSBC have lost around 10% of their value since 9 March. It was on the cards following the high-profile failure of US-based, Silicon Valley Bank. This wasn’t the only bank to hit the skids recently, as Silvergate Capital and Signature Bank have also joined the party. It may not be the last. First Republic Bank was similarly teetering until its rescue by a group of larger banks.

Encouragingly, I don’t think this is a systemic catastrophe-in-waiting like the last financial crises. Central banks are acting swiftly and the risk of market contagion for UK lenders is low. Certainly, I don’t foresee a run on the major banks that was commonplace during the 2008/09 financial crisis.

So, maybe the panic around the global banking sector over the last week or so has provided an inviting entry point for me.

Attractive FTSE 100 banks

As Warren Buffett once said, “we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.” I’d like to invoke this approach within the UK banking sector.

Unlike their US counterparts, UK banks aren’t as heavily exposed to risk-weighted assets. So, the likelihood of a liquidity crisis stemming from a bank run is small.

I find Barclays the most attractive stock because of it’s bigger discount relative to peers. The poor performance of its shares across 2022 has made its valuation look like a bargain. The shares are the cheapest of the lot (a P/E of 5 versus the FTSE 100 P/E of 14). In fact, it’s one of the cheapest blue-chip banking stocks listed on the London Stock Exchange.

On the flipside, bond sensitivity to interest rate rises is what got these US banks into deep water. Recent events could well cause central bankers to reconsider further rate hikes. This isn’t the best news for banks. I’ll certainly be monitoring for the Bank of England’s MPC interest rate decision later this week.

Additionally, Barclays international banking exposure poses a risk, relative to a more domestic operator like Lloyds Banking Group. In this sense I can understand why some investors dumped the stock. But in my opinion this sell-off was overdone.  

Too big to fail?

The crux of the matter is that safe-haven banks are often seen by regulators as too big to fail. Silicon Valley Bank was too big to fail, Credit Suisse was too big to fail. And guess what, they have both been bailed out.

In this vein, institutions like Barclays, Lloyds, and HSBC are all too big to fail. I like Barclays the most because it is the cheapest of the lot, and one of the most oversold following the market panic.

This mini-banking crisis reminded me of how safe systemically important banking institutions remain. A stock like Barclays is a strong long-term option for a defensive portfolio like mine.

The next few weeks will be critical in determining sentiment toward the global banking sector. A lot can still change, and sentiment could deteriorate even further. Barclays shares could get cheaper still — I am aware the shares have recently rallied.

I’ll keep my powder dry in the hope the discount opportunity widens on the stock. If it does, I’ll take my chance be greedy with some Barclays shares.

The post FTSE 100 banks look cheap after SVB’s failure. Is now the best time to buy? appeared first on The Motley Fool UK.

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Henry Adefope 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.

ICG Enterprise Trust (LSE:ICGT) is one of the longest-standing constituents of the listed private equity sector. I am hot on this investment trust because of its purpose to generate consistent and resilient total returns across economic cycles. 14 consecutive years of double-digit underlying portfolio growth confirms this. Frankly, I’d quite like this beacon of consistency in my portfolio amid the ups and downs of the market. It helps that it looks as cheap as chips, too. It’s definitely worth assessing whether it is the number one stock for me to buy this month.

Bargain season

I discern whether a stock is a bargain by looking at its relative valuation and future earnings growth potential. My signals are bullish on both counts for ICGT.

Firstly, with a price-to-earnings ratio of 12 times, ICGT is cheaper than its peer average (14 times). It also has a cheaper valuation than the FTSE All Share (14.5 times). Secondly, its portfolio earnings are forecast to grow 35.4% per year. That’s a pretty high growth projection. So, I am scratching my head as to why the trust has a widening price discount relative to its assets.

Discounts

In fact, the entire listed private equity sector is trading at historically wide discounts. It’s at odds with strong returns the sector has delivered over the years. ICGT could be one of the worst-hit victims.

Michel Degosciu, founder of specialist research and advisory firm LPX AG, believes the stock is trading at a “significant undervaluation based on the current discount level”. At last glance, the shares were trading at a 40% discount to assets. This comes despite the bullish projected performance of its underlying portfolio.

As a bargain hunter I obviously find this attractive. But I know all too well that discounts can be a poisoned chalice. The fact that demand for the shares is at a relative low is not a ringing endorsement in my eyes. The share price has been in freefall since February following a strong start. Degosciu attributes this to investors pricing in the impact of higher interest rates on its portfolio.

Admittedly, the trust has a high level of gearing (borrowing). This could limit the scope of the discount narrowing, particularly if its underlying assets get devalued.

Long-term outperformance

Regardless, the stock’s historical outperformance of the UK equity market is stark. Intermediate Capital is a big player in the direct private mezzanine sector. Its “historical track record in the mezzanine sector is very good”, according to Degosciu.

Additionally, the trust’s bias toward defensive growth companies is a positive for me. I feel this has contributed to its resilient NAV performance with companies that can grow earnings in today’s tough conditions.

All in all, I view the firm as a heavily discounted growth company that pays healthy dividends. In addition to income, the company has a long-term share buyback programme.

It’s a generous mix and suggests to me that the company’s helm have a bullish outlook. I am similarly bullish, and the stock is on my watchlist currently. It’s too cheap not to be. I just need to monitor the discount. If it continues to widen, the less likely I’ll be to purchase. Vice versa if it narrows.

The post £1 for 60p. Is this the top stock to buy in March? appeared first on The Motley Fool UK.

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Henry Adefope 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.

‘Growth shares’ are those stocks of companies that are expected to grow their revenues and profits at a faster pace than the market. While they can be found in any field, most are in innovation-focused industries like technology.

Such stocks have been the biggest drivers of global investment returns over the past decade and more. Think Tesla, Meta Platforms and Amazon. The returns these stocks have generated for shareholders over the years is astounding.

Growth shares vs value

However, last year, value was in while growth was out. Rising rates pushed me to re-evaluate future profits at the fast-growing tech stocks. I felt many companies were seriously overvalued. A sell-off ensued, as investors like me rushed to safer defensive stocks. So now I’m asking myself, should I avoid growth shares altogether this year and buy value shares instead?

In contrast to fast-growing stocks, value shares tend to remain steady through all sorts of market conditions. They take time to gain in price, but some that are out of favour can provide me with the opportunity to snap up good investments that are undervalued.

Harsh climate for growth

They look more attractive than growth shares at the moment because of these uncertain times and rising interest rates. You see growth stocks benefited from an era of cheap borrowing and modest inflation during the last decade. They could fund their growth with cheap borrowing. The party stopped in 2022 as central banks began an aggressive cycle of interest rate hikes to combat record inflation. The Bank of England’s Monetary Policy Committee doesn’t intend to change course until its target of 2% is within reach, for instance. I don’t foresee that happening within the next two years, and prolonged central bank tightening isn’t ideal for growth stock valuations.

Consistent profitability

Regardless of this, I understand that diversification is important. I don’t think I should only focus on defensive sectors that can weather the near-term economic outlook. Not only that, but growth shares have been performing better than I expected this year. Thus, it’s important for me to be exposed as much to sectors like technology and biotech, as I am to value sectors like financials and utilities.

Certainly, cheaper value stocks are still more attractive over the long term. But it’s not the time for me to neglect growth, particularly if such stocks continue to rebound after a tough 2022.

For example, Tesla’s share price has recovered by 77% year to date. Not many stock market companies will perform as well as that for the whole of 2023, even though its valuation still looks toppy following its prior meteoric rise.  

Regardless, it’s a splendid example of a consistently profitable growth stock. The expectation of consistent profitability should reduce my risks in buying some growth shares.

So what conclusion have I reached? After the Silicon Valley Bank debacle, the picture for tech doesn’t look pretty at all. Growth shares aren’t at the top of my wish list this year. But I don’t intend to give them cold shoulder. I’ll consider those that are profitable and deeply undervalued — a sort of growth-meets-value strategy!

The post Should I completely avoid growth shares this year? appeared first on The Motley Fool UK.

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Henry Adefope 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.

Despite the FTSE 100 flirting with record highs, the picture for the underlying UK economy looks grim. Inflation is till persistently high and further interest rate rises have been mooted by the UK’s central bank. It’s not the most conducive environment for business.

It has certainly reassured me about my current approach of selecting defensive stocks that can perform despite the broader economy. Defensive sectors like financial services and utilities performed well last year. I am backing them to perform well again in 2023 amid similar conditions.

Inflation-busting UK stocks

I consider financials and natural resource companies as good defensive plays. However, I think the profits of these UK stocks are under attack from politicians and regulators. A recent example is the UK Government’s Energy Profits Levy. This is in addition to the price cap for energy firms. Conversely, I am interested in stocks that can pass on price increases to customers more stealthily.

My view is that consumer specialist distributors are best placed to do this. They can naturally pass on rising prices with operational leverage. Consumer specialists Unilever plc (LSE:ULVR) and Diageo plc (LSE:DGE) are two UK stocks I think fit this bill.

Pros and cons  

Let’s begin with Unilever. It was one of the FTSE 100’s steadiest performers in a volatile 2022. I attributed this to its startling pricing power. The company experienced a broad reduction in sales volume. However, the underlying business still posted higher sales due to being able to raise prices significantly. With this pricing superpower, I expect to see greater demand for the shares if overall business conditions persist. However, I must still be mindful that sales volumes can decrease even further if inflation remains stubbornly high.

Meanwhile, beverage-marker Diageo’s diverse product line works in its favour. The company’s sales, operating profit, and margin all grew last year. It increased its dividend as a result. For me it’s the definition of consistent performance come sleet or snow. However, my gripe is that I will be receiving stability rather than a total return from this UK stock. It’s certainly not a dividend stock. Furthermore, its net debt figure has started to creep up. Higher interest rates will only increase its borrowing costs.

Resilient profitability

Looking ahead, the Bank of England’s MPC committee has signalled potentially more rate rises to normalise stubbornly high inflation.

It’s crucial I have a well-balanced portfolio over what I think will be a prolonged period of high inflation. In this regard, I view FTSE 100 shares like Unilever and Diageo as UK stocks that can enhance my portfolio value going forward. Most importantly, this is regardless of whether inflation remains high or not.

For this reason, I’m keen to buy shares in either stock this year. I just need to be wary of portfolio transaction costs regarding my recent portfolio changes.

The post 2 UK stocks capable of beating inflation this year appeared first on The Motley Fool UK.

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Henry Adefope 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.

After smashing historic highs, investor confidence in the FTSE 100 is soaring. I’d normally be inclined to think the stocks are at a premium. Not this time. I believe the main index has plenty of room for growth. So, my attention on its constituents is at an all-time high.

Cheap as chips

Yes, the FTSE 100 recently breached the 8,000 mark. Yet, it is trading at a huge discount to both US and European peers.

I find the price-to-earnings ratio useful for assessing value. It measures how long it will take a company (or index) to pay back its market value. The lower the ratio, the cheaper a company is.

The forward price-to-earnings ratio for the FTSE 100 is 10.6 times. It’s a remarkable figure compared to the valuation of international peers. In the US, the S&P 500’s price-to-earnings ratio is 29.1 times. This is 44% above its modern-era market average of 19.6 times and suggests this market is overvalued. The FTSE 100 is also cheaper than its European counterpart, the STOXX Europe 600 index. The forward price-to-earnings ratio for this index is 12.1 times.

Contrastingly, the FTSE 100’s relatively lower valuation may be down to its heavy weighting towards certain sectors. Namely oil, mining, and financial services. I think these stocks offer anaemic growth compared to the technology stocks that have driven global markets over the last decade. I also feel the Brexit-effect has depressed valuations across the index.

A high price-to-earnings ratio means that investors are willing to pay more for a stock (or index). Thus, investors may think the more tech-focused international indexes are better placed for growth than the FTSE 100. Certainly, I observe the UK’s leading index has lagged its peers on the global stage for years.

Is this the winning FTSE 100 stock?

Nevertheless, I plan to take advantage of this potential bargain opportunity. My best option is to buy individual shares within the FTSE 100 index. I am predominantly focused on the stocks I deem to carry the the best long-term value.

A prime example is natural resource company Glencore plc (LSE:GLEN). The shares currently trade on 5.3 times forward earnings. It’s very cheap. Additionally, the shares are seen as having the potential to reach 685p this year by analysts. It’s currently 517p, so it’d be quite the uplift.

I see two further plus-points. Firstly, I believe Glencore has the best commodity diversification of the majors. Secondly, commodity prices should remain well supported by higher inflation. Glencore will be a big beneficiary of this.

However, there are some clear risks to holding this FTSE 100 stock. Its recent record profits are forecast to decline over the next three years. I also foresee higher interest rates compounding an already high debt burden.

More growth in store

Overall, I observe that the tide has turned in favour of commodity-linked stocks. Contrastingly, fast-growing technology companies are less in favour. The FTSE 100’s outperformance of the broader MSCI World Index by 5.45% last year suggests this.

I don’t envisage the challenging economic environment abating. This is why commodity majors like Glencore are firmly on my watchlist. I believe the FTSE 100 will continue to benefit too due to its significant weighting to this sector.

The post Record-breaking FTSE 100 still looks cheap. It hasn’t peaked appeared first on The Motley Fool UK.

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Henry Adefope 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.

The FTSE 100 recently hit a record high, defying the gloomy economic forecasts. But when I look underneath the bonnet, all is not what it seems. The FTSE 100 has lagged some other major indexes this year. This requires me to get savvy with my individual stock picking. The FTSE 100 isn’t outperforming, but there’s a stock that clearly is — HSBC Holdings (LSE:HSBA).

The global bank is already beating the FTSE 100. The shares are up 15% this year, compared to the main index (4%).

FTSE 100 banking shares

With recent interest rate rises, it’s an opportune time for me to look at the banking sector. Many analysts are forecasting that the Bank of England’s Monetary Policy Committee will lift interest rates higher still. This could be a boon for banks in 2023. I’m bullish on their earnings and on these stocks, based on higher interest income, decent dividend growth, and better financial health since the financial crises.

Of course, these stocks aren’t without risk. The benefits of interest rate rises tend to be partially countered by an uplift in loan defaults, particularly in the case of a struggling British economy. Certainly, low economic growth can severely dampen the growth prospects of the banking sector — as well as the businesses it serves.

HSBC’s global coverage

My main attraction to HSBC shares above other UK banks is its global operations around the globe. It’s a major player in Asia and is doubling down on investment there. This broader exposure also reduces the risk to me, because group profits aren’t dependent on the performance of just one economy.

However, this global coverage also poses a risk. The bank is bloated with many unprofitable global ventures driving high operating costs. Its retail banking offer in New Zealand is one example. I’d be keen to see plans in its upcoming results of more asset disposals to make the company a leaner, more profitable machine.

FTSE 100 bargain

Regular readers will know that I love bargains. Despite the good run in the HSBC share price recently, it’s the fundamentals that make the most compelling investment case for me.

I note the stock is one of the highest-yielding in the FTSE 100, with a forward yield of 7%+. I also see that the shares are trading at a very modest value too. The price-to-earnings ratio is 7 times, compared to the UK peer average of 9 times.

Alongside this, analysts seem to think the stock is trading at 40% below its fair value. I certainly see upside potential regarding its valuation. Revenue for the underlying business is forecast to grow 7.1% per annum (on average) during the next three years, compared to 5.8% growth forecast for the UK banking sector overall.

I hope its upcoming Q4 and full-year results for 2022 this month will make for pleasant reading.

In the higher interest rate environment globally, HSBC is well-positioned to benefit, I feel. Though a cyclical business that could be victim to a faltering UK economy, it’s internationally diversified enough to increase its profitability. I expect HSBC to generate more income this year as interest rates rise.

For these reasons, I intend picking up some shares. But that’s on the proviso the long-term outlook in the upcoming results this month is in line with my expectations.

The post HSBC shares are outperforming the FTSE 100. Should I buy this month? appeared first on The Motley Fool UK.

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Henry Adefope 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.

Harbour Energy (LSE:HBR), the oil and gas producer, hasn’t had the best run recently. It was booted out of the FTSE 100 and relegated to the FTSE 250 last year due to a double-digit cut in its valuation. I mainly attributed this to the announcement of a windfall tax on oil and gas companies. I’m no stranger to market panic, and I think there’s a chance the stock may have been oversold toward the end of 2022. But year to date it’s up almost 10%. So, the question for me is: can this positive momentum continue in the long run? I’m not convinced it can, despite some good points.

The stock in focus

Regular readers will know that I love my dividends. Harbour Energy, Britain’s largest oil and gas producer, is one of the FTSE’s biggest payers. Its production output is above and beyond the notable oil majors like Shell and BP. So I think it warrants me taking a closer look.

For a stock that’s one of the highest yielding in the index, it’s trading on a dirt cheap valuation. Its price-to-earnings ratio of 2.4 times compares to its UK peer average of 13.9 times.

When a situation like this occurs, I ask myself two questions. Have investors missed a trick? And is the stock cheap for a reason? The cheap valuation is partly down to the UK’s Energy Profits Levy on oil and gas companies, one of the highest rates in the world. Clearly, it’s fairly damaging to the company’s profitability — its headcount has been cut this year as a direct result.

The positives

Dividends are an important source of income for me, but the health of the business is crucial to maintaining those dividends. So it’s important I check whether the dividend payments are covered by earnings, and if those earnings are growing.

I note that the dividends are more than adequately covered. Its dividend cover (earnings over dividends paid) is 3.8 times. This is very conservative and leaves plenty of breathing space in the case of adverse events, as well as a future increase in the dividend payment. The company confirmed in its last trading statement that it retains. flexibility over an increase to its $200 million dividend plan.

However, when I look at the company’s earnings, they’ve been growing, but a little too slowly for my ambitions. Sub-1% year-on-year growth simply doesn’t cut it for my portfolio.

Is this an attractive long-term play?

However, it’s not just the anaemic earnings growth that concerns me. Harbour Energy’s earnings are forecast to decline by an average of nearly 20% per year for the next three years. I think it’s a very worrying backdrop.

Moreover, it has a high level of debt, and higher interest rates will drive up borrowing costs. I also think the company has a relatively unstable dividend track record. I can’t necessarily bank on a reliable level of income from the stock.

Despite my appeal of the stock’s cheap valuation and high dividend yield — the long-term picture doesn’t look favourable to me.

The company has a challenging period ahead. In my view, it’s a FTSE value trap, not a bargain, so I’m not buying.

The post Is this stock the FTSE’s biggest bargain right now? appeared first on The Motley Fool UK.

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Henry Adefope 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.