Many FTSE 100 companies might struggle in the second half of 2020. The UK economy faces an uncertain outlook. The coronavirus crisis has left some deep scars in certain parts of the economy, while Brexit could inflict future pain towards the end of the year.
However, while some companies may struggle over the next few months, others could prosper. There’s one group of FTSE 100 stocks, in particular, that might do better than others.
FTSE 100 stocks to buy
Homebuilders like Berkeley Group Holdings (LSE: BKG) may do better than many other FTSE 100 companies going forward.
At the height of the coronavirus crisis, the government put the UK housing market into cold storage. But in recent weeks, the market has started to return to normal.
Recent trading updates from Berkeley’s FTSE 100 peers suggest demand is returning to normal levels, although many companies are set to miss their construction targets for the year.
This is relatively good news. The UK housing market remains structurally undersupplied. And if homebuilders are struggling to increase output, that’ll constrain supply. That may support home prices.
At the same time, there’s speculation the government may extend the Help to Buy scheme. Other proposed initiatives, such as a stamp duty cut, may help stimulate the market. Low-interest rates have also made mortgages more affordable.
All of this support for the market is highly positive and may ensure that house prices don’t decline substantially in the months and years ahead. That’s excellent news for FTSE 100 homebuilders like Berkeley.
Double your money
Berkeley has laid out some ambitious growth targets over the next few years. The FTSE 100 homebuilder is targeting a cumulative pre-tax profit of £3bn between 2020 and 2025. It has just over £1.1bn of cash on its balance sheet to buy land to help hit this goal.
This profit target seems highly ambitious. The company’s market capitalisation is only £5.2bn at the time of writing, which suggests that if the firm hits these growth targets, the stock could offer a significant margin of safety at current levels.
The group also plans to return £280m every year to 2025 to investors via dividends. At current prices, that suggests a return of £1.4bn in dividends at least over the next five years. That’s a return of 27% on the FTSE 100 giant’s current share price.
On top of this, a return to 2019 levels of ability to take the stock back to 5,500p, an increase of nearly 30% from current levels. This income and capital growth potential could lead to a near 60% return for shareholders over the next five years.
Special dividends are also a possibility. Berkeley announced plans to return £1bn to shareholders earlier this year following a bumper 2019 (including the £280m mentioned above). The FTSE 100 the company has since scraped these extra cash return plans. But if management reinstates the special cash returns, there’s potential for the business to return 70-80% of its current market capitalisation to investors over the next half-decade.
Including the potential for capital gains, this implies the FTSE 100 stock could double shareholders investment over the next five years.
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Rupert Hargreaves has no position in any of the shares mentioned. 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.