Great margins, high dividends, low debt: Are these Footsie shares the best buys on the market?

Can these three shares continue to be investor darlings for years to come?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You only have to glance at the financial results for Domino’s Pizza (LSE: DOM) to understand the appeal of a franchisee business model. Interim results through the end of June saw sales up 17% year-on-year and operating margins improving to an astounding 23%, leading to a full 22.7% jump in post-tax profits.

And this growth isn’t just coming from new store openings as the period saw a 10.9% improvement in like-for-like sales as improved digital offerings tempted people into ordering more pizzas.

Although the company’s net debt rose to £10.9m, this was due to a £46.6m investment in Nordic Domino’s franchises and is well within the company’s 1.25 times EBITDA leverage range.

High growth and a healthy balance sheet allowed the company to increase interim dividends by 16.7% and analysts are forecasting shares to yield 2.2% this year. Although the shares are highly valued at 27 times forward earnings, great growth prospects, growing dividends and fantastic margins lead me to believe the shares could live up to high expectations.

And now for something completely different

Selling £1,000 handbags is unsurprisingly a high-margin business for luxury brand Burberry (LSE: BRBY). Although underlying operating margins are under pressure due to faltering sales in China and rising costs, they were still very high for a retailer at 15.4% last year.

That said, despite solid profitability the company can’t escape the continued trouble in China. A crackdown on graft and conspicuous consumption by the Communist Party combined with a slowing economy once again led to double-digit declines in same store sales in Burberry’s Hong Kong locations, where many Mainlanders shop to take advantage of lower luxury taxes.

The Chinese market will turn around eventually though, and Burberry remains well positioned to survive this downturn. The company had net cash of £660m at the end of March and worldwide revenue remained level year-on-year in Q1. With dividends growing and expected to yield 2.8% this year, continued profitability and a forward P/E ratio down to its lowest level in years, now could be a great time for contrarian investors to take a closer look at Burberry.

Cheap fares, cheap shares?

Valuations in the FTSE 100 don’t come much lower than the 10.3 forward P/E that shares of EasyJet (LSE: EZJ) now trade at. The current share price also means dividends will yield around 4.8% this year, so why in the world are shares so cheap?

Investors are rightly worried that any Brexit-induced economic slowdown will lead to fewer holidays abroad for UK consumers. As the UK’s largest budget carrier, this is no empty threat for EasyJet.

There’s also the fact that years of rapid growth for the budget sector as a whole are leading to the age old problem for airlines: overcapacity. This is a valid worry as industry watchers were forecasting a slowdown in seat demand even before Brexit.

The question then becomes whether EasyJet can survive any slowdown. With net cash at the end of Q3 at £368m, there are few worries concerning the balance sheet.

However, the company did post a £24m loss in the six months through March, a far cry from the solid 14.6% pre-tax margins posted last year. Shares may look like a bargain now but with fare wars heating up amid slowing demand, EasyJet’s time in the sun may be over for the time being.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Burberry and Domino's Pizza. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »