The Motley Fool | Aug 03, 2020 14:10
Last week I bought two unloved FTSE 100 shares on the back of some disappointing financial results.
As a rule, I try to build my portfolio around non-cyclical quality growth stocks, or progressive income stocks where I think the company in question has a good long-term runway of growth ahead of it.
Examples might be Smith & Nephew (LON:SN), Experian, Unilever (LON:ULVR), Hargreaves Lansdown (LON:HRGV), Sage or Halma (LON:HLMA). In fact, I think that’s a pretty decent growth starter portfolio. But occasionally, I get tempted into a cyclical struggling company where I think there’s tremendous value over the medium term.
This FTSE 100 bank is at an eight-year low Shares in Lloyds bank (LSE: LLOY) fell to just 26p last Thursday. The 12-month high was 70p so the share price has tumbled 63%. Over the same period, the FTSE 100 is down by about 23%. I would expect this underperformance. They say that banks are first in and first out of an economic downturn. It’s a highly cyclical company.
The bank has announced a loss before tax of £602m for the first half. It also set aside a further £2.4bn for bad debts in the second quarter. Low Interest rates are squeezing margins and a struggling economy paints a bleak economic picture. The dividend is suspended and may not return in full for some time.
But I think this is exactly the time when you should consider buying a cyclical share. Be greedy when others are fearful and all that.
I agree with Harvey Jones that the key here is time and patience. This is a share to buy and ignore for five years. If/when the economy recovers and the dividend gets anywhere close to 3p per share again, that could be a yield of 11.5% you’re locking in.
If banks weren’t cyclical enough for you… The other FTSE 100 company I’ve taken the plunge with is housebuilder Taylor Wimpey (LSE: LON:TW). As you might expect, if you’re a housebuilder that can’t build houses, revenues are going to suffer.
The firm posted a pre-tax loss of £39.8m for the first half of the year. Full-year completions are expected to be around 40% down. The generous dividend (including special dividend payments) has long since been scrapped.
But I see these problems as temporary. Net cash actually surged to nearly £500m and the total order book was up 23% from a year ago. The government stamp duty holiday should also help boost sales.
As I’ve said before, there’s a chronic shortage of housing in the UK. The government has promised to build 300,000 per year. This situation hasn’t changed. A price-to-earnings ratio of eight is also appealing for this FTSE 100 builder.
As the economy begins to recover, surely the dividends will return. They were running at over 10% last year. There’s hopefully some upside in the share price as well. This is another share to buy and forget about for a few years and I think your patience will be rewarded.
David Barnes owns shares in Taylor Wimpey, Lloyds Bank, Experian, Smith & Nephew, Unilever, Hargreaves Lansdown and Sage. The Motley Fool UK has recommended Experian, Hargreaves Lansdown, Lloyds Banking Group (LON:LLOY), Sage Group (LON:SGE), 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.
Motley Fool UK 2020
Written By: The Motley Fool
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