During the coronavirus crisis, I’ve become more conservative when selecting stocks and shares. Since March, I’ve focused almost exclusively on the corporate giants: FTSE 100 members.
FTSE 100 bargains still abound
Though the FTSE 100 has risen around a quarter (actually 24%) since its 23 March low, I’m unconvinced that the worst is over. I keep worrying about these four problems:
1. The economy. Will the recovery be V-shaped or shallow?
2. Politics. Will world leaders (Trump!) throw a spanner in the stock market’s works?
3. Trade. How will the US-China showdown pan out?
4. Earnings. Strong companies will grow, the weak will struggle, and the weakest will die.
Long term, the market is a weighing machine
Though I worry about these issues, I know that #4 is the most important factor for long-term investing. As billionaire Warren Buffett remarked in 1974, “In the short run, [the market] is a voting machine; in the long run, it’s a weighing machine.”
Hence, my definition of great companies are those which increase their earnings strongly over time. There will be ups and downs, but much higher earnings 10 and 20 years from now would be my goal.
Another ‘boring’ FTSE 100 dividend
Last week, I highlighted the 7.7% yearly dividend on offer from FTSE 100 miner Rio Tinto. Today, I turn to yet another mega-mining company, BHP Group (LSE: BHP), Rio’s bigger FTSE 100 rival.
American satirist Mark Twain quipped that a mine is “a hole in the ground owned by a liar.” While that was true during the Gold Rush, BHP is a world-leading resources company, extracting, processing and selling minerals, oil and gas worldwide.
When it comes to earnings and dividends, big is beautiful, and you don’t get much bigger. Based in Melbourne and jointly listed in Australia and the UK, BHP is a £90bn colossus employing 72,000 people across the globe. Here are BHP’s fundamentals:
Share price, 1,635p; 12-month price change, -8.4%; price-to-earnings ratio (P/E), 10.5; dividend yield, 7.07%; and dividend cover, 1.34 times.
As you can see, after the steepest stock-market crash in history, BHP’s share price is down a mere 8.4% in 12 months. It has ranged between 940p on 12 March (the buying opportunity of a lifetime) and 2,079p last July.
BHP shares trade on slightly over 10 times annual earnings and offer a tidy dividend yield of nearly 7.1%. Good news: this dividend is well covered by earnings, so it’s solid and has scope for growth.
Its last dividend of $0.65 was paid on 24 March, at the height of the market convulsions. Also, this FTSE 100 firm properly looks after its owners, with its cash dividend rising steeply every year since the lows of 2016. This shows the sheer financial muscle of this literally ‘boring’ company.
In short, reinvesting that annual 7.1% yield into more shares will almost double your money in 10 years (all else being equal). What’s not to like?