There’s a lot of cyclicality in the FTSE 100 with big banks and miners commanding a disproportionate weighting in index tracking funds because of their massive market capitalisations.
Out-and-out cyclical stocks tend to rise and fall with the undulations of the macroeconomic environment and we can never be sure when the next cyclical plunge in profits and share prices will arrive.
Hidden nasties
I’m nervous about holding the FTSE 100 because the cyclicality is not in plain view. With 100 or so stocks jumping up and down within a tracker investment, it’s hard for me to keep tabs on what factors could be affecting the price. If I did invest in a FTSE 100 tracking fund, I’d treat the whole thing as a cyclical trade and only invest when the index is on the floor in the hope of riding the next cyclical up-leg. Then I’d sell when the index is once again near its highs.
Rather than the FTSE 100, I’d go for a firm that is performing well, such as Travis Perkins (LSE: TPK), which updated the market today. As well as trading under its own name, it has a stable of brands including well-known names such as Wickes, City Plumbing, PlumbNation, BSS and PTS. The theme of today’s third-quarter update was that “trading is on track despite a challenging market backdrop.”
Inflation-driven sales increases
Third-quarter sales came in 3.5% higher than a year ago with like-for-like sales up 4.1%. For the year so far, sales lifted 3.3% with like-for-likes 3.4% up. However, the gains in like-for-like sales came from price increases driven by inflation with sales volumes coming in flat. That said, the company reckons it saw ongoing strong growth within businesses in its Contracts division and “significant” improvement in sales performance within the Plumbing & Heating division.
Chief executive John Carter said of the outlook that “trading conditions in our markets continue to be mixed, with consumer discretionary spending under pressure from rising inflation and on-going uncertainty in the UK economy.” Yet despite this apparently harsh trading environment, he assured us that the directors have confidence in the long-term fundamental drivers of the firm’s markets. And he said “this underpins our plan to invest in our businesses to improve our customer propositions and extend our competitive advantage.”
A good financial record
Although cautious on the market outlook, Mr Carter told us that the firm is on course to meet full-year expectations. According to City analysts following the firm, that means a decline in earnings per share of 5% for the current year followed by a 5% rebound during 2018, which looks like a potential steady-as-she-goes immediate outcome.
The firm has a good financial record and has lifted its dividend by 80% over the past four years and further dividend increases look set to arrive this year and next. Meanwhile, at today’s share price around 1,503p, the forward dividend yield runs just over 3.2% and those forward earnings should cover the payment around two-and-a-half times.
Assuming the economy is not about to fall off a cliff, I think Travis Perkins looks more attractive than a FTSE 100 tracker right now.
