As the FTSE 100 continues to recover through 2021 from last year’s difficulties, these two shares from the index are those that I’m most likely to buy with any spare cash.
High yielding FTSE 100 share
First up is SSE (LSE: SSE). As I pointed out last month, I think SSE is ideal for ESG investing. With more and more ‘professional’ money (that of fund managers and pension funds) going into ESG, that could really benefit a company like SSE.
The energy company has been transitioning to renewables for a long time so has a head start on many of the oil companies that are now trying to catch up.
It operates in the UK and Ireland so is focused on socially and politically stable countries, which lessens the risk of nasty surprises that can come with operating in some parts of the world. For example, the UK government is unlikely to nationalise or seize assets, or not pay what is contractually obliged.
I think SSE presents a turnaround opportunity as well, so has some appeal for me as a value investment. The forward P/E is only 16, which given the improvement at the company, is still quite modest. I like that between 2020 and 2021 operating profit and ROCE are expected to improve dramatically.
It’s this investment, known as capex, which is an ongoing risk, however. The amount of money needed to meet its ambitions for producing renewable energy is very high. That puts pressure on the dividend and the balance sheet. Dividend cover has also been low for some years, putting further pressure on shareholder rewards.
The high-margin housebuilder
Housebuilder Persimmon (LSE: PSN) is a very different company to SSE. But I think it’s one of the best long-term holds among the builders because of its high margins and return on capital employed (ROCE).
Its operating margin in 2020 was 23.5%, while the ROCE was 20.9%. These numbers fell, I suspect, mainly because of the pandemic and therefore could bounce back with the recovery. If that’s the case, it could further boost the share price.
On top of that, it has a forward P/E of around 12.5, so seems to me to represent very good value.
There’s some growth potential with the Persimmon share price too, but mostly I see it as a quality stock that provides very good income. The dividend is being restored after a temporary suspension during the the pandemic. And I suspect it could grow strongly in the coming years.
But the company is very tied to the UK economy and a rise in interest rates could hit it hard as demand for mortgages, and therefore houses, might fall. Any repeat of building-quality issues, which it has had in the past, could also tarnish its reputation and share price.
SSE and Persimmon are both strong dividend-paying shares that I’d likely add to my portfolio with any spare cash. Both provide income that would compound over time and grow year-on-year. Both provide essential products (electricity and homes, respectively). They won’t go out of demand or become obsolete because of technological changes. This is why I think they’re great long-term businesses.
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Andy Ross owns shares in Persimmon. 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.