The coronavirus crisis is dragging on, and the latest upsurge means UK shares remain cheap. I reckon these three FTSE 100 stocks could make decent long-term additions to my portfolio. I’d buy all three and hold them for at least 20 years while compounding my gains.
Why I’d buy these 3 cheap UK shares
I’ve noticed that many shares with big market capitalisations have been looking weak recently. I’m sure that’s related to the recent upsurge in Covid-19 we are seeing and its potential to damage the world economy.
But it seems some big-cap shares have been thoroughly binned by investors. For example, pharmaceutical giant GlaxoSmithKline (LSE: GSK) and smoking-related products producer British American Tobacco (LSE: BATS) are both well down from recent highs.
But both those firms operate defensive, cash-producing businesses. And their dividend yields are high. With the share price near 1,344p, GlaxoSmithKline’s forward-looking yield for 2021 is just under 6%. And with the share price around 2,572p, the forward-looking yield for BATS is a little below 9% for next year.
However, I admit that both firms carry big debt burdens. If you adjust for borrowings, the earnings multiples may not be as attractive as they at first appear. Indeed, GlaxoSmithKline’s rises to about 17, and the rating for BATS increases to just under 14.
However, I’m confident that both firms have dependable businesses capable of continuing to generate cash over the next couple of decades. With steady cash flow, I reckon the shareholder dividends will likely keep on coming. So, whether we see any capital growth from a rising share price or not, I’d compound my gains over the next 20 years by reinvesting the dividend income.
But I think GlaxoSmithKline’s research and development pipeline should deliver rising earnings given a 20-year runway. So, I’d expect both capital and income growth from my investment in the company. BATS, I admit, is a little tricky.
Cash flow to keep shareholder dividends flowing?
It seems clear the tobacco sector is out of favour with investors and I see two possible reasons for that. Firstly, institutions and private investors could be shunning the likes of BATS on ethical grounds. Secondly, the industry is in long-term decline.
But I’d ease my conscience by donating a share of my investment profits to charity. And I reckon the firm’s prodigious and reliable cash flow will keep the company paying generous dividends, even if the valuation continues to shrink and keeps capital gains elusive.
My third pick for a 20-year portfolio is fast-moving consumer goods company Unilever (LSE: ULVR). I think it’s the king of consumer companies on the London market. And it has an awesome record of execution that shows in its impressive trading record.
With the share price near 4,694p, the forward-looking dividend yield is around 3.3% for 2021. But the attraction for me is the potential for the dividend to grow over the next 20 years. Indeed, the firm’s brands are phenomenal in their strength. I’m thinking of names such as Hellman’s, Domestos, Dove, Vaseline, and Persil.
And the FMCG sector is well known for its defensive characteristics. We only need look at the strength of trading through the pandemic so far to see the power of the Unilever’s business in action.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. 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.