The FTSE 100’s ongoing crash could present buying opportunities for long-term income investors.
Yes, there may be further capital losses ahead in the short run. The ultimate impact of coronavirus on the world economy’s performance is a ‘known unknown’.
However, a number of FTSE 100 shares appear to offer wide margins of safety and high income prospects. Here are two such companies that could be worth buying today and holding over the long term.
The outlook for housebuilders such as Barratt (LSE: BDEV) continues to be relatively upbeat. This week’s reduction in interest rates could help to improve housing affordability, and may support demand for new homes. In addition, government support for the sector looks set to continue. This could lead to further improvements in profitability across the industry.
Barratt’s recent update highlighted that demand for new homes continues to be resilient. This is despite risks such as Brexit being present over the past few years. Investor sentiment has been relatively weak for some time. This has led to the stock now having a price-to-earnings (P/E) ratio of just 7.9. Its dividend yield stands at over 8% and it is due to be covered 1.6 times by net profit this year.
Although Barratt may experience further share price falls in the short run, over the long run it seems to have investment appeal. It has high total return potential, enjoys strong demand for new homes, and has a solid market position. This all means its risk/reward ratio appears to be very attractive. So now could be the right time to buy a slice of the business to generate an impressive income return over the coming years.
British American Tobacco
Another FTSE 100 share that has been unpopular among investors over the past few years is British American Tobacco (LSE: BATS). Regulatory changes in the US have contributed to a more challenging outlook for e-cigarette sales. And investors continue to be concerned about reduced-risk products cannibalising tobacco sales.
British American Tobacco now trades on a P/E ratio of just 8.1. It also seems to lack the defensive characteristics that previously made it a popular stock during periods of economic uncertainty.
In the long run, the company’s focus on reducing debt and investing in its next-generation products could boost its financial performance. Furthermore, its dividend yield stands at 8% and is covered 1.5 times by net profit. This suggests that it is affordable, and could even grow at a brisk pace given the prospects for its tobacco segment in the near term.
As such, the stock appears to have a mix of income and value appeal for long-term investors. Although a quick turnaround in its fortunes seems unlikely, its strategy and wide margin of safety suggest that it may offer an attractive risk/reward ratio after its recent woes.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
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Peter Stephens owns shares of Barratt Developments and British American Tobacco. The Motley Fool UK 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.