It’s been a roller coaster ride for UK investors over the last few weeks. While many blue chip companies have surged higher post-Brexit, other stocks have fallen significantly.
Let’s look at three well known FTSE 100 companies and see whether it’s time to buy these popular stocks.
Supermarket price war
Tesco (LSE: TSCO) may be trading close to five-year lows but I’m not convinced it’s time to buy the supermarket just yet.
It’s no secret that the supermarket landscape is extremely challenging at present with Aldi and Lidl aggressively targeting market share. However it now looks as if the environment is set to become even more challenging with talk that Asda may soon cut prices and launch a price war. Executives at Asda owner Walmart recently stated that Asda will prioritise sales over margins, meaning prices could be cut in an attempt to keep customers coming through the door. Given that Asda has the firepower to hurt its rivals, with the highest margins among its peers, this could have serious consequences for profits across the sector and is bad news for Tesco.
Another issue for me is Tesco’s poor dividend prospects. It’s been a remarkable fall from grace for this former income champion because after paying out 14.76p per share in dividends each year between 2012 and 2014, the company paid just 1.16p per share for FY2015 and nothing for FY2016.
As a long-term investor I don’t mind waiting for a company to turn things around, but I prefer to be paid a dividend while I’m waiting. For this reason, Tesco isn’t on my buy list right now.
Recession resilience
Despite being heavily exposed to the UK economy, I believe the future is brighter for hospitality giant Whitbread (LSE: WTB).
As much as 62% of Whitbread’s revenues come from hotel chain Premier Inn and while leisure stocks can suffer during an economic downturn, the ‘value’ offering of these hotels could be a positive as consumers and businesses cut back. According to analysts at Deutsche Bank, Whitbread’s hotel business performed better than any other European equivalent during the 2009 downturn, suggesting the company may be able to survive another downturn relatively unscathed.
Another positive is Whitbread’s ambitious expansion plans. It aims to have 85,000 UK Premier Inn rooms by 2020, up from around 65,000 now, and to double Costa sales in the same period.
Whitbread has an enviable track record of revenue growth over the last decade, and with the stock trading on a P/E ratio of 14.8 times next year’s earnings with a 2.5% dividend yield, the company is beginning to look attractive after the Brexit sell-off. I’m cautiously optimistic about the future.
High quality business
Another stock that potentially offers value in the Brexit aftermath is insurance giant Prudential (LSE:PRU).
A high quality business with a strong record of creating shareholder value, Prudential has grown its dividend every year since 2004, with operating earnings in that time growing 13% a year against 8% for Legal & General and 4% for Aviva.
The insurer should benefit from weaker sterling as Prudential’s Asian and US life businesses make up around 30% and 40% of earnings respectively. And with the stock trading on a P/E ratio of just 10.2 times next year’s earnings with a dividend yield of 3.2%, Prudential doesn’t look expensive right now.
