The latest data from the Office for National Statistics (ONS) suggests that the UK economy is slowly coming back to life. But activity levels are well below normal and a recession seems likely. How should you invest in this uncertain environment?
I’ve found three FTSE 100 shares I think will perform well in difficult times.
Keep it simple
The coronavirus pandemic has shown how dependent we are on supermarkets. I don’t see this changing, especially in a recession, when shoppers become even more price conscious.
My top pick of the UK’s listed supermarkets is Wm Morrison Supermarkets (LSE: MRW). This Bradford-based business combines traditional supermarket retail with a modern approach to growth. Behind the scenes, it supplies groceries for Amazon‘s online delivery service and is the main wholesale supplier for McColl’s convenience stores.
Morrison’s food production business gives it an edge in the wholesale sector, helping to support higher overall profit margins. I also like the low debt levels and large, freehold property portfolio – 87% of stores are owned outright.
The Morrisons share price looks decent value to me on 13 times forecast earnings. The dividend hasn’t been cut and I estimate the current dividend yield at about 3.6%. I see this FTSE 100 share as a low-risk buy.
Profit from silver savers
There’s speculation that widespread lockdowns may trigger a baby boom. We’ll see. But for now, the reality is that in most developed countries, the population is getting older. These silver savers often have more disposable cash and better healthcare than younger people.
This should be good news for FTSE 100 share Smith & Nephew (LSE: SN). This medical technology company makes nearly half its profit from orthopaedic implants such as knee and hip replacements.
Other growth areas include products for wound care, including chronic conditions relating to diabetes and pressure ulcers. Older patients form an important part of these market segments, too.
Smith & Nephew flies under the radar for many private investors, but this £14bn firm enjoys profits margins in excess of 15%, strong cash generation and low levels of debt. Growth has also improved over the last couple of years. The shares aren’t cheap, on 20 times forecast earnings. But I see this as a quality business. I’d be happy to buy at current levels.
This FTSE 100 share yields 6.6%
Utility group SSE (LSE: SSE) was rocketing at the start of the year, but the shares were hit by the stock market crash. This popular FTSE 100 income stock looks attractively priced to me at about 1,200p, with a dividend yield of 6.6%.
In a year when so many companies have cut their dividends, is this payout still safe? I think so.
At the end of March, the firm said that it intended to maintain the dividend at 80p this year. This gives a yield of 6.6% at current levels. If the market was pricing in a dividend cut, I’d expect the forecast yield to be higher than this.
My hope is that SSE’s role as the UK’s largest renewable generator may have provided some protection against lower electricity demand during lockdown. This is because renewable power gets sold into the grid before fossil fuel power.
It’s too soon to be sure about the outlook for 2020–21, but I think SSE looks good value at current levels and rate this share as a buy for income.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. 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.