What a year it has been for the BP (LSE: BP) share price. Year-to-date, the stock is up 45%. It’s all a far cry away from a couple of years ago when the oil price turned negative and it was sitting on heavy losses. As an existing shareholder, it has been one of my best performing shares. However, as recession fears grow, is the party about to come to a spectacular end?

Surging free cash flows

When it comes to cash flows, oil stocks are in a class of their own. In their Q3 results released today, BP reported surplus cash flow of $3.5bn. For the first nine months of the year, it reached $14.2bn. This is over 300% higher than the same period last year.

Underlying profit was $8.2bn, slightly down on the record figure last quarter. This reflected lower oil prices, which averaged $101 for the quarter.

BP continues to use a significant portion of these profits to bring down its net debt. I believe this is a very prudent strategy as it reduces interest expense at a time when interest rates are rising.

Shareholder returns

One of the primary reasons why I invest in BP is for passive income. Last quarter it raised its dividend per share by 10% to 6.006 cents. Although it didn’t raise it this quarter, the dividend yield is still a respectable 4.2%.

The company remains committed to allocating 60% of free cash flow to share buybacks. Over the next three months it intends to buy back another $2.5bn of its own shares. So far this year it has announced buybacks of $8.5bn. With a smaller issued share capital, existing shareholders will end up owning a larger proportion of the company.

BP is undervalued

Despite its significant share price appreciation, I still believe that BP shares offer tremendous long-term value.

Clearly, BP does face some short-term headwinds. There is increased uncertainty about how demand for oil will hold up should the economy go into recession. Demand is also being affected by ongoing lockdowns in China.

However, what makes me extremely confident about BP over the longer term are underlying structural factors related to the supply of oil.

In the decade leading up to the global financial crisis, oil prices rose to $150. In response, more and more demand came online. Today, the macro set-up is totally different.

Since the shale boom of 2014, the oil industry has suffered from a severe lack of underinvestment. Several factors are likely to ensure that this remains the case for several years.

First, increasing calls for windfall taxes makes oil companies nervous about investing. Second, as interest rates rise in a bid to cool inflation it becomes a double-edge sword. Yes, it reduces demand; but the increase cost of capital hits exploration budgets. In response, oil companies cut back on much-needed long-term investment.

There is no magic bullet for solving the energy crisis. Until structural forces holding down supply are resolved, the medium-term outlook, in my view, remain rosy for BP. That is why I continue to add shares to my portfolio on a regular basis.

More reading

Andrew Mackie has positions in BP. 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.

In 2022, oil and gas stocks have been far and away the standout performers in the FTSE 100. Year-to-date, the Shell (LSE: Shel) share price is up 47%. However, investors still remain wary about buying into Big Oil. Here I’ll explain why I believe that Shell, and the broader industry, will continue to outperform the general market in the years ahead.

Gushing free cash flow

In its Q3 results released today, Shell reported earnings of $9.5bn. That’s over double what it reported in the same period last year. EBITDA (earnings before income tax, depreciation and amortisation) was 60% higher, standing at $21.5bn.

Despite these impressive figures, they’re down slightly on Q2 as oil prices have come off their highs of $120, reached earlier in the year.

Growing dividends and buybacks

One of the primary reasons for investing in Shell is for its dividend. When the pandemic struck, it shocked the market by reducing it by 66%. It’s now seeking to woo investors back by steadily increasing dividends.

In Q3, it announced a dividend per share (DPS) of 25 cents, unchanged from last quarter. In Q4, however, DPS is earmarked to rise 15%. If that dividend were maintained, my calculations are that the stock would provide a yield of 4.2%.

Admittedly, Shell’s dividend yield is hardly headline-grabbing. However, the company continues to buy back its own stock at an increasing rate.

Throughout 2022, it’s expecting to buy back $18.5bn of its own shares. Over the next quarter alone, it has earmarked buybacks totalling $4bn. As a result, total distributions to shareholders will be in excess of 30% of cash flow from operations (CFFO). Given that at the nine-month mark, CFFO stands at $46bn, shareholders are been handsomely rewarded.

Commodities bull market

Over the last year, I’ve written extensively about the oil and gas industry. While many investors have given the sector a wide berth, wary about its medium-term prospects, I continue to remain bullish.

Back in June when oil stocks began selling off, I was in favour of taking a contrarian stance. Since then, the commodities sector has bounced back strongly. So where do I go from here?

Since reaching a peak of $120 in June, the oil price has slowly been declining. However, this decline needs to be set in a wider context.

In a bid to increase supply, the US government has been selling off its strategic petroleum reserves (SPR) at a record rate over the past year. At this rate, the SPR will be zero in 18 months.

Elevated levels of inflation are forcing central banks to push up interest rates. As the world economy heads into a likely deep recession, demand will undoubtedly take a hammering.

Yet despite these two huge macro forces bearing down on it, the oil price continues to hold up well. The reason is that inventories remain extremely tight. It’s the lack of supply coming online in the years ahead that’s the real driver for oil prices to remain elevated.

Levels of capital expenditure across the industry remain depressed. Solving this issue will involve international consensus around energy security. Until addressed, I expect the Shell share price to continue to perform well. That’s why I recently increased my position in Shell.

More reading

Andrew Mackie has positions in Shell plc. 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.

In today’s challenging economic environment, investors have been rotating out of growth stocks and into value ones. What particularly attracts me to value stocks is their ability to generate a passive income for me. One sector I believe is primed to grow its dividend payouts in the years ahead is banking.

Dividend champion

FTSE 100 banking giant HSBC (LSE: HSBA) is one stock on my radar for generating passive income. Despite beating analysts’ profit expectations, the market didn’t warm to its third-quarter results. Yesterday, its share price fell 7%. Year-to-date, the share price has been flat.

In 2022, analysts are predicting a dividend per share (DPS) of 29 cents. At today’s share price, that equates to a yield of 5.8%. However, what really attracts me to HSBC shares, is the prospect of bumper returns in the years ahead.

For 2023, analysts are forecasting a 58% increase in DPS to 46 cents. This is on the back of materially higher expected returns. The company is also reinstating quarterly dividends.

Driving the improved performance of HSBC, is rising interest rates. In the last 18 months, net interest income (NII) has increased 30% to £8.5bn. Unsurprisingly, this has had a positive impact on the net interest margin (NIM).

Targeting £100 a month from HSBC shares

There are two methods I can employ in order to target £100 a month in dividend income from the shares.

Firstly, I could make a lump sum investment. Crunching the numbers, and assuming a forward yield of 9%, I would need to invest £13,300 to reach my target. At a price of around 443p per share, I would therefore need to buy 3,010 shares.

Secondly, and a better proposition for me, would be to build my position in the stock over time. I will make an initial investment of £1,000. Each month thereafter I will buy £100 of its stock. If I reinvest all my dividends too, in approximately seven years I would have reached my target of 3,010 shares.

Of course, these figures are purely illustrative. They assume that both the dividend yield and share price remain constant; a highly unlikely scenario.

Is HSBC’s dividend yield safe?

A key metric I look at when determining dividend sustainability, is dividend cover. This tells me how many times earnings are covered by DPS. In 2023 and 2024, analysts are predicting that earnings per share (EPS) will be 96p and 104p, respectively. Consequently, dividend cover is comfortably above the recommended two times.

However, the banking industry is a notoriously cyclical one and earnings estimates can change very quickly.

The macroeconomic environment has deteriorated during 2022. Rising inflation and stagnant growth have raised the spectre of the return of stagflation.  Little surprise, therefore, that HSBC has significantly increased its expected credit loss (ECL) provisions. Its large exposure to China’s commercial real estate sector is another particular concern.

Despite these risks, I believe that HSBC is well placed to ride out the economic storm and emerge stronger.

Over the last few years, it has been exiting low-growth markets and pivoting toward Asia. A growing, propensity to save, middle class, coupled with low investment product penetration, provides HSBC with incredible growth opportunities. As its share price languishes, I intend to build a position in the stock.

More reading

Andrew Mackie has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

So far this year, oil stocks have been the standout performers in both the S&P 500 and FTSE 100. By contrast, the darlings of the stock market over the past 10 years, the FAANGs — Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet), are all down. But with the long-term viability of the oil industry in doubt, are the days of Big Oil numbered?

2022 – the year of Big Oil

Recently published research by CMC Markets, highlights the huge chasm that has opened up between oil stocks and the rest of the stock market. This is summed up perfectly in the following table:

Occidental Petroleum has been the standout performer in the S&P 500 in 2022. Soaring oil prices have turned the company into a cash generating machine. Its extraordinary gains could have been helped by the Warren Buffett effect. Berkshire Hathaway owns 7m of its shares.

In the UK, both Shell and BP shareholders have profited handsomely from rising commodity prices. This includes Glencore, whose main source of revenue is coal.

The performance of such stocks is in complete contrast to the technology sector. In 2021, it was the unprofitable tech companies that first began to falter. Now, in 2022, the contagion is spreading to the mega-cap growth stocks. Investors are waking up to the reality that fundamentals do matter after all.

The bull case for oil

History demonstrates that as oil hovers around the $90-$100 range, investment should be flowing into the sector. After all, that’s what happened during the shale boom of 2014, when oil hit $100. A similar picture emerged in the run up to the global financial crisis, when it hit $150.

Today, as a percentage of GDP, capex investment in the commodities sector is at a near 20-year low. The predominant reason for this underinvestment, I believe, is the rise of the environment, sustainability and governance (ESG) agenda.

Yet significant tailwinds for commodities means that oil is likely to be in high demand during the next decade. For example, the pandemic and increasing geopolitical tensions have put significant strain on supply chains. Many companies are actively moving their manufacturing operations away from China. In such a scenario, commercial construction in the US and UK markets could boom.

The bear case

The case against oil fundamentally rests on it being a dying industry. As the world reduces its reliance on hydrocarbons, the industry could be left with stranded assets. But the fundamental unknown is the time frame over which this will happen.

The pandemic brought to the fore problems that, in my opinion, had been there for some time. For the last 15 years, human and capital investment has flowed into the tech sector. However, the rise of inflation changes everything.

During periods of high inflation, history shows that commodities do well. Rising interest rates will eventually reduce demand. But until the supply side is dealt with, I see oil stocks continuing to outperform the general market. That’s why, on any dips, I continue to add to my commodities stocks.

More reading

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Andrew Mackie has positions in Glencore, BP and Shell plc. The Motley Fool UK has recommended Amazon. 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.

2022 hasn’t been a good year for stock investing returns. Since January, the S&P 500 is down 25%, putting it firmly in bear market territory. The FTSE 100, on the other hand, has only fallen by 8%. However, some shares have fallen a lot further than that.

One sector that has taken a battering recently is insurance. In particular, I’ve been tracking two stocks I believe are in serious bargain territory.

Prudential

When it comes to growth stocks, the insurance sector doesn’t spring to mind. However, Prudential (LSE: PRU) is undoubtedly a growth business.

The company has reinvented itself lately. Its business model is now aligned solely to the long-term structural growth opportunities in Asia and Africa.

It offers a diversified suite of insurance products, including health and protection, which accounts for over a third of all new business profits.

Despite fast-rising prosperity, people in Asia still have low levels of insurance cover, with 39% of health and protection spend met by individuals directly. A large unmet need has created a vast health protection gap estimated at $1.8trn.

In the next 10 years, the size of the industry revenue pool across its core markets is expected to grow by $900bn. Translated to its Asia business, gross written premiums are projected to more than double in that time to over $60bn.

Of course, these are just estimates and there are no guarantees. At present, shareholders are more concerned with short-term headwinds. Rolling Covid restrictions in India, Malaysia and Singapore have dented margins. In Hong Kong, the closure of the border with Mainland China has resulted in overall annual premium equivalent (APE) in its largest market slump 10%.

Prudential’s share price is down 33% year-to-date. Yes, it could fall further. Nevertheless, I intend to buy its shares.

Legal & General

My second insurance stock pick is a traditional income one. Like Prudential, Legal & General (LSE: LGEN) has seen its share price plummet recently. It’s now down 29% year-to-date. This has had the effect of pushing up its forward dividend yield to 8.9%.

Normally, yields approaching 10% ring alarm bells. As a likely recession looms, dividend cuts can never be ruled out. However, I’m less concerned about L&G’s.

In the first half of 2022, it achieved 22% growth in cash generation and 14% growth in capital generation. The company remains confident in its ability to grow cash and capital faster than its dividend commitment.

This confidence is backed up by a number of growth drivers, including ageing demographics. As populations live longer, so too must their pensions. Organisations are increasingly turning to L&G to help them find solutions to their ongoing pension commitments. At the same time, individuals need to ensure that their retirement funds and other assets can finance longer retirements.

The accelerating share price sell-off is a direct result of the recent turmoil in the bond market. However, despite volatile markets, the group issued a press release to the effect that it hasn’t been forced to sell any gilts or bonds to shore up its capital position.

When markets are in turmoil, I always remember one of Warren Buffett’s classic quotes: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. In L&G, I’m seeing such an opportunity and I’ll be buying.

More reading

Andrew Mackie has positions in Legal & General Group. The Motley Fool UK has recommended Prudential. 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.

At present, only a handful of companies in the FTSE 100 offer a dividend yield greater than 10%. One such name is leading housebuilder Barratt Developments (LSE: BDEV). A plummeting share price has helped push its yield close to 11%. But as major cracks begin to appear in the housing market, is this yield sustainable?

Cooling housing market

Yesterday, Barratt updated the market and it did not make for pleasant reading. In response, its share price fell 5% and now sits at levels not seen since 2013.

Net private reservations per average week for the period July to September stood at 188, a fall of 34% from the same period last year.

Against a backdrop of high-inflation, a growing cost of living crisis and rising interest rates, the fall is unsurprising.

House price inflation, for now, remains robust. The average selling price in its forward book as of this month is £377,200. This represents a 9.5% rise on last year. However, this increase is being offset by build cost inflation, which is estimated to be 10% through 2023.

Mortgage rates

In order for the housing industry to grow new homes supply, it’s vital that homebuyers are able to access affordable and competitive mortgage finance. This looks increasingly under threat.

A few months back the mortgage market looked reasonably healthy. Offsetting the imminent closure of the Help to Buy scheme, banks had been increasing the availability of 95% loan-to-value (LTV) lending.

Deposit unlock, a brand-new scheme developed in collaboration between industry and lenders, enables first-time buyers and existing homeowners to purchase a new-build home with a 5% deposit.

The recent turmoil in the bond market, though, has had a direct knock-on effect on mortgage availability. Banks acted swiftly, both raising rates and withdrawing a number of products from the market.

Today, the Royal Institute of Chartered Surveyors (RICS) warned that rising mortgage rates will likely drive house prices down. With so much money tied up in land banks and existing developments, that will inevitably lead to a strain on Barratt’s balance sheet.

Dividend yield sustainability

Its juicy dividend yield is certainly enticing. The company has also instigated a £200m share buy-back programme.

However, given all of the above, I find it hard to believe that its inflation-beating yield won’t be cut in the near future. It’s already forecasting a reduction in net cash during the next quarter, reflecting investment in land and work in progress to support growth in home completions.

Dividend cover is a further concern to me. The group has implemented a phased reduction in dividend cover of 0.25 times per year to stand at 1.75 times in FY24. This suggests to me that it’s expecting earnings per share (EPS) to come under strain.

A positive case can clearly be made for buying Barratt shares. Aspirations of home ownership remain high in the UK and demand continues to outstrip supply.

However, its multi-year-low share price reflects a new economic reality. Although I’m not expecting anything quite like the meltdown that happened during the global financial crisis, I’m of the view that the share price has further to fall in 2022. I will, therefore, wait for a more attractive entry point before buying.

More reading

Andrew Mackie 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.

As fear grips the market, investors have been dumping their stock holdings. The FTSE 100 has been trading firmly below 7,000 points. But in the scramble for the safe haven of cash, I think the baby has been thrown out with the bath water.

It’s during such times that savvy investors hunt down stocks where there has been unwarranted carnage. In doing so, however, it’s imperative to avoid a bull trap.

We’ve already seen many mega cap tech stocks in the US recover from their June lows. But for me, this is the sign of a classic bear market rally and I still see significant downside risk here.

Retail in the doldrums

In the bloodbath, one stock has really caught my eye, Associated British Foods (LSE: ABF). Its share price is now trading at levels not seen since 2012.

ABF does face some significant challenges. Last month, its retail division issued a profit warning. True, total sales at the Primark chain are expected to be 40% higher than last year. But that’s mostly due to the fact that all its stores are now open and trading as normal.

On a like-for-like basis, sales this quarter are expected to be 9% below pre-Covid levels. Comparable sales across Europe should fall behind by as much as 18%.

To protect its cost-conscious brand image, Primark has decided not to implement any further price increases. Consequently, operating profit margin in 2023 is expected to be below the 8% projected for the second half of this financial year.

Diversification is key

However, ABF is a lot more than just Primark. Some 60% of its revenues comes from a diversified group of businesses, including grocery, sugar, agriculture and ingredients. Many of these have been thriving in an inflationary environment.

AB Sugar is one of the largest sugar producers in the world. Revenues at this division are significantly ahead of last year, driven by soaring sugar prices.

Of course, like many commodities, sugar prices have come down recently. However, I still believe the fundamentals are good for this sector, particularly with supply side constraints still evident. Indeed, ABF is predicting European sugar demand will remain in excess of production for some time.

It’s a similar story in its grocery division where increased prices should drive revenue growth. Many of its brands are household names, not only in the UK, but across the globe. These include Twinings, Ovaltine, and Silver Spoon.

Keep it in the family

Over half the issued share capital of ABF is owned by the Weston family. The business is on the whole conservatively run with a history of prudent financial management. This, I believe, is a source of strength in the present economic environment.

ABF is a strong, well-capitalised company with net cash of £1.5bn. This financial strength has enabled Primark to advance the inventory purchase of its winter stock in anticipation of supply chain bottlenecks. Primark has also recently launched a new website and is to launch a trial for click-and-collect.

With a proven business model and excellent long-term growth potential across its businesses, I view ABF as a no-brainer buy. That is why, over the last few weeks, I’ve been adding to my position here.

More reading

Andrew Mackie owns shares in Associated British Foods. The Motley Fool UK has recommended Associated British Foods. 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.

For the first time in over six years, the boohoo (LSE: BOO) share price has fallen below 40p. For existing shareholders — and I’m one — this has been a particularly painful experience. The burning question for me is can this former growth darling ever recover, or should I throw in the towel and sell out?

A year to forget

The present woes for the company can be traced back to a hastily convened analyst call in December 2021 where the company revised down its growth forecasts from only a few weeks earlier. Since issuing that profit warning, boohoo’s share price has collapsed and is down over 70%. Over the past 12 months it has lost 85% of its value.

For the quarter ending 31 May, revenues declined 8% on the same period in 2021. Admittedly, part of this could be explained by pandemic-fuelled spending which made for a tough comparator. Nevertheless, as 2022 has unfolded it has become apparent that boohoo’s troubles are anything but, what management once described as, “transient in nature”.

Issues stacking up

In the US, a key growth market, international parcel delivery stands at 10 days. Such a proposition will not resonate with fashion-conscious teens and 20-somethings planning their next night out.

Costs are rising across the business. This is being driven by inflation, supply chain snarl-ups, higher salaries and large fixed costs related to the expansion of its planned opening of a US distribution centre. As a result, the business has implemented double-digit price increases.

A surge in returns, coinciding with the ending of lockdown, has normalised at a new higher level. It presently stands at over 30%. Given such stats, it’s little wonder that it has started charging for returns.

Patience required

I’m not expecting underlying trading conditions to improve for boohoo anytime soon. Nevertheless, a strong case can be made that its share price sell-off has been completely overdone.

Citadel, a leading US hedge fund, recently acquired over 5% of the business. Clearly, it believes that the company has been oversold.

Many of boohoo’s problems are outside of its control. But not all. This includes those related to poor working conditions in its supply chain. But the business has worked hard and has moved on from those mistakes.

The opening of a new distribution centre in the US in 2023 should be a game-changer. This will house key brands including boohoo, PrettyLittleThing, Nasty Gal and Karen Millen. As delivery times in that market tumble, the company believes demand will come back.

In addition, the business has invested heavily in automating its Sheffield distribution centre. With the intention of automating its other three UK centres, this should help cut down its cost base.

In the short term, boohoo’s share price is likely to remain volatile. Any nasty surprises in its half-year results due out later this month, could lead to further significant falls. If they’re bad, it’s not inconceivable that it could retest its all-time low of 20p.

However, with a long-term investing horizon, I’m less interested in short-term price movements. At its present price, I believe it offers the potential to supercharge my future returns. That is why I recently bought more of its shares.

More reading

Andrew Mackie owns shares in Boohoo. The Motley Fool UK has recommended boohoo group. 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.

We all know that Warren Buffett’s favourite holding position is forever. However, finding stocks that are able to prosper through multiple business cycles and economic downturns isn’t an easy task. Yet following a recent pull-back, I took the opportunity to buy into a FTSE 100 blue-chip stock that I believe has incredible long-term growth potential.

A powerful business model

Legal & General (LSE: LGEN) is primarily known for its insurance and retail retirement expertise. Indeed, it is the UK’s number one individual life insurance provider.

However, its business tentacles stretch far and wide. Its institutional retirement division takes on pension scheme liabilities from corporate schemes. Doing so helps companies de-risk their liabilities while providing guaranteed payments to individuals within their schemes.

Its investment management division has assets under management of £1.4trn and has deep expertise in defined contribution (DC) and defined benefit (DB) pension schemes.

Finally, its investment capital division invests across a number of specialist asset classes. This includes commercial real estate, clean energy, housing and SME finance. And L&G is a top-10 house builder by revenue.

Growth drivers

The sheer diversity of L&Gs business model is a significant selling point for me. It is in a unique position to capitalise on a number of long-term growth drivers. Many of these drivers provide a significant degree of immunity in a low-growth economic environment.

Ageing demographics is a trend that continues to accelerate across many western economies. Pension risk transfer (PRT) is a huge and growing market. In the UK alone, it is estimated that only 13% of £2.4trn of DB pension liabilities have been transferred to insurance companies such as L&G. The rising interest rate is a likely catalyst for companies to consider accelerating the de-risking of their pension plans.

Pension freedoms and welfare reforms add up to another huge driver for future growth. Over the past few years there has been an increasing awareness of the need to take personal responsibility for financial security, particularly in later life.

Climate change and technological innovation are key drivers too. For example, L&G has invested in over 500 start-ups to date.

Is Legal & General undervalued?

L&G’s recently-released half-year results convinced me that the market is undervaluing its long-term prospects.

In the last 10 years, the company has seen its earnings per share (EPS) and dividend per share grow by a compound annual growth rate of 11%.

EPS for the first six months of 2022 was higher than the company achieved in the whole of 2015. Today however, the share price sits at the same level as back then.

The business is confident that it will consistently grow cash and capital faster than its dividend commitment. This excess cash provides it with tremendous flexibility. It could, for example, decide to return excess cash to shareholders or reinvest for future growth.

Insurance is a risky business. Rising inflation coupled with low global growth is likely to hit L&G’s bottom line. Should inflation become entrenched and policy responses by central banks prove ineffective, a significant economic downturn is likely to follow.

Despite these risks, I feel that long-term structural changes across society are trends that L&G is well positioned to capitalise upon. That is why, in the last few weeks, I added to my position.

More reading

Andrew Mackie has positions in Legal & General Group. 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.

A gold and silver gem

Fresnillo is the world’s leading silver producer and one of Mexico’s largest gold producers. It has a near 500-year history of mining precious metals in South America. Its mining concessions extend to approximately 1.7 million hectares where it operates both underground and open pit mines.

In 2021, revenue was $2.8bn, representing a 9% increase on the previous year. This was mainly down to average realised silver prices, which rose 16% during the year.

It possesses a rock-solid balance sheet. Its earnings before income tax depreciation and amortisation (EBITDA) stands at $1.2bn. With a net debt of $1.1bn that means its net-debt-to-EBITDA ratio is negative.

Silver – a versatile metal

Like its more expensive cousin gold, silver is predominantly viewed as a monetary metal. However, it also has many industrial applications too. With the greatest electrical and thermal connectivity of all metals, silver is a key component in solar panels, semiconductors and electric vehicles.

Decarbonisation of the global economy together with the ‘internet of things’, in which hundreds of billions of physical devices are connected to the internet, are two unstoppable megatrends that should ensure silver remains in high demand well into the future.

Silver also acts as an inflationary asset. In the early 1980s, when inflation was rampant, the price of silver hit $50 an ounce. More recently, during the Covid crash, silver prices rose as the general stock market tanked.

What I like about silver is that the metal looks historically undervalued relative to other commodities, including gold. That’s why I have been buying shares in Fresnillo over the last few months as I don’t know when it’s likely to bottom. But in light of the structural forces highlighted above, it’s a fair bet that Fresnillo’s share price should be higher in the long term.

Challenging environment

As one would expect of a cyclical commodities business, Fresnillo’s dividend has ebbed and flowed over the past decade. However, it has increased its dividend for the past three years. Its policy is to pay out between 33% and 50% of profit after tax each year. In 2021, the payment was $245m.

Like so many mining companies, Fresnillo has been particularly impacted by soaring energy prices, which it relies on to fuel its transport fleet.

And last year, the Mexican government introduced a law that prohibited the use of contractor labour. This hit the business particularly hard. Long term though, it’s likely to provide it with greater operational resilience.

Overall, I believe that the prospects for the company are good. Later this year, a major new mine, Juanicipio, comes on-line. This will boost gold and silver production significantly. As Fresnillo’s share price languishes at multi-year lows over recessionary fears hitting silver demand, I recently bought more shares for my Stocks and Shares ISA.

More reading

Andrew Mackie has positions in Fresnillo. The Motley Fool UK has recommended Fresnillo. 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.