A £600 investment in Greatland Gold (LSE: GGP) shares two years ago, excluding broker’s fees and stamp duty, would now be worth £288, a fall of 52%. The share price peaked in December 2020, since when it has fallen by over 75%. Unfortunately, I invested exactly £600 in the company, and now have significant paper losses. But I’ve learnt an important lesson.

What does it do?

Greatland Gold is a mining exploration company. Its primary activity is the development of the Havieron gold and copper deposit in Western Australia.

It owns 30% of the project, joint venture partner Newcrest Mining (one of the largest gold producers globally) holding the rest.

A feasibility study is due to be published before year end. A decision will then be made as to whether to mine Havieron. So far, the signs are encouraging and the company estimates the value of the deposits at $1.2bn.

Greatland Gold’s 30% share is worth $360m, less than the company’s market cap of $475m. This implies it’s over-valued, but it does have five other mining interests, and there’s always the possibility of more precious metals being discovered at Havieron.

The current stock market valuation therefore reflects the company’s future earnings potential, rather than the fact that, by the end of 2021, it had seen losses of £28m. So far, it has yet to generate any revenue.

Option

Under the terms of the JV, Newcrest can acquire an extra 5% of Havieron at fair market value.

Once the option is exercised, the proceeds would be used to repay the outstanding balance on a loan facility Greatland has with Newcrest. The junior partner therefore gains nothing, other than to reduce its debt and its share of Havieron.

If this happens, it’s likely that the share price would fall further.

Funding

In August, $34m was raised by Greatland Gold in an over-subscribed rights issue. The bad news for existing shareholders was that the shares were issued at a 15.5% discount.

And in September, the company announced it had secured the necessary funding to develop its share of Havieron. Bank debt of $140m was agreed, along with an equity investment of up to $75m from Wyloo Metals, a privately-owned exploration company.

Interest on the debt will be based on the rate set by the Reserve Bank of Australia. As in most countries, interest rates down under are on the rise. However, they’re not forecast to increase as steeply as in other parts of the world. The company’s interest bill should therefore not increase too much.

If the investment from Wyloo is approved by shareholders, it would be at an average price of just over 9p per share. Wyloo would then own 14.6% of Greatland Gold.

What should I do?

I knew that investing in Greatland Gold would be a punt. But despite being down on the deal, I’m not going to sell.

However, if I’m honest, I don’t think the share price will recover any time soon. The future discounted cash flows from Havieron, and the other less advanced projects, already appear to be factored into the share price.

So I’ve learnt one very valuable lesson — I should have dug deeper with my research before investing in this particular mining company.

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James Beard has positions in Greatland Gold. 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.

Over the past five years, the Flutter Entertainment (LSE: FLTR) share price has increased by over 40%. However, it’s currently down 35% from the all-time high that was reached in March 2021.

I wonder whether it will achieve these levels again?

History

Flutter Entertainment was created in 2016 by the merger of Paddy Power and Betfair. Since then, it has grown through acquisition, buying gambling companies in Canada, Georgia and Italy. To diversify, it has also acquired a US fantasy sports operator, and an online bingo website and app.

This period of expansion has seen sales increase by £4.3bn in four years.

Although most of its £6bn revenue in 2021 was generated online, Flutter Entertainment still operates 600 shops on the high street.

Growing markets

According to Technavio, a market research company, the world’s gambling market will be worth $565bn by 2025, an increase of $220bn in five years. This excludes the online gaming market, which Acumen believes could be worth $132bn by 2030.

That’s all good news for the “world’s leading online sports betting and gaming operator“.

FIFA said that bookmakers took $155bn during the 2018 World Cup. This year’s tournament which, ironically, is to be held in Qatar (one of the few countries in the world where gambling is illegal), is expected to beat that figure.

Flutter Entertainment should therefore be one of the winners from this year’s competition.

Half-year results

Investors liked the half-year results that were released in August, with the share price soaring 14% on the day.

The company disclosed an 11% year on year growth in revenue, and an increase in its average monthly number of customers to 8.7m.

Interest rates

However, spending on gambling and gaming is discretionary.

A backdrop of rising interest rates, which adversely impacts on the disposable incomes of customers, is not good news for the company.

Flutter Entertainment is also exposed to rising borrowing costs, through its relatively high level of debt. Borrowings were £62m at the end of 2017 but, four years later, had increased to £3.8bn. This is to be expected, given that a large proportion of its acquisitions have been funded by debt.

The company currently has a gearing ratio of 4.1 times EBITDA (earnings before interest, tax, depreciation and amortisation). This compares to its medium-term target of one-to-two times. Achieving this milestone is important because, at this point, the company has committed to reviewing its dividend policy.

A dividend was last paid in October 2019.

When the company released its results during the first week of August, a downturn in spending by its customers hadn’t been seen. But since then, central banks around the world have been raising interest rates.

What have I concluded?

At the moment, I feel it’s too much of a gamble for me to invest in Flutter Entertainment.

Although the markets in which it operates are growing rapidly, I fear that the coming economic headwinds and rising interest rates will dent its revenues.

I also like to own shares in companies that pay a dividend.

I’m therefore going to keep the company on my watchlist and review the situation in the new year.

Who knows, perhaps by then England will have won the World Cup. But then again, I wouldn’t bet on that either.

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James Beard 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.

The BAE Systems (LSE: BA.) share price has rocketed by almost 50% since the beginning of 2022. I am considering whether I have left it too late to invest in Europe’s largest defence contractor.

Ethical investing

In an era of socially responsible investing, BAE Systems is not going to appeal to everyone. The company supplies combat vehicles, munitions, and weapons systems to governments throughout the world.

And, it sells a lot of them.

Revenue in 2021 was £19.5bn, generating an operating profit of £2.3bn.

But, if I am prepared to accept the argument, that BAE Systems is helping governments fulfil their primary responsibility of providing security for their people, do I believe the company’s shares are a good long-term investment?

Doomsday

It scares me to say it, but war is a growth market.

Earlier this month, US President Joe Biden suggested that the world is facing the biggest threat of nuclear war since the Cuban Missile Crisis of 1962.

The Doomsday Clock, which is intended to convey the likelihood of a man-made catastrophe, is currently at 100 seconds to midnight, the closest it has ever been. This is not surprising given that there are currently 40 active wars or minor conflicts in the world.

And, according to the Stockholm International Research Institute, military expenditure in 2021 exceeded $2trn for the first time.

This is where BAE Systems stands to gain.

Ukraine

On the day before Russia invaded Ukraine, the company’s share price was 601p. A week later, it was 724p, an increase of 20%. Since then, it has been climbing steadily.

In contrast, the FTSE 100 has fallen by nearly 4% since the war started.

It looks as though the company is starting to see the impact of global instability on its order book.

In the first half of this year, new orders of £18bn were secured, compared to £10.6bn during the first six months of 2021. At 30 June, the total order book stood at £52.7bn — equivalent to nearly three years’ sales.

Government spending

Last year, 43% of the company’s revenue came from the US and 20% from the UK.

The US leads the world in defence spending, and racked up a bill of over $800bn in 2021.

Prior to announcing her departure, Liz Truss promised to increase the UK defence budget to 3% of GDP by 2030. That could be worth an additional £50bn a year. Governments are keen to keep military spending local, meaning BAE Systems is likely to benefit significantly from this uplift.

The defence giant is also set to gain from its exposure to the US, and the strength of the dollar. The company says a 10% increase in the dollar is worth an additional £625m of sales.

What have I decided?

Despite these positive reasons to invest, I think I have left it too late.

Although boasting of 18 years of dividend increases, the yield is currently around 3%, which is below the FTSE 100 average.

The company also has a price-to-earnings ratio of nearly 20, suggesting its shares are not that cheap.

And if, as I hope, the war in Ukraine ends soon, there is likely to be a downturn in the share price.

For these reasons, I am not going to buy, but will keep BAE Systems on my radar.

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James Beard 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.

Ocado (LSE: OCDO) shares are currently changing hands at more than 70% below where they were a year ago. Even so, I won’t be putting them on my shopping list any time soon.

Here are five reasons why I’m not investing in “the world’s largest dedicated online grocery retailer“.

1. No profit

Call me old-fashioned, but I like a company that makes a profit. In its 22 years of trading, Ocado has only made a full-year profit three times.

The company’s sales may have grown more than 70% over the past four years, but its loss before tax has deteriorated by £168m. And analysts don’t expect Ocado to be profitable any time soon.

2. No dividend

The company has never paid a dividend.

This is partly because it hasn’t been consistently profitable, but also due to a policy of reinvesting surplus funds into growing the business.

Retaining cash for investment is laudable but, to help me counter inflation, I like to own stocks that pay a decent dividend.

3. No cash

On 29 May, Ocado reported a net debt position of £759m. This had worsened by £947m compared to a year earlier.

In June, the company raised a further £875m — £575m through a rights issue and £300m via a revolving credit facility.

The board says it has no need to raise further funds, but if the losses continue for longer than expected, this will change.

Ocado is also a very capital-intensive business. It spent £559m on property, plant and equipment in 2021.

4. No growth

In its September trading update, the board disclosed that it expects growth in customer numbers and orders during the last quarter. But full-year revenue in 2022 will be lower than in 2021.

This is because customers are putting fewer items into their online shopping baskets.

During the third quarter, the average basket, at £116, was worth 6% less when compared to the same period in 2021. More worryingly, the number of items in the average basket was down 10%.

5. No logic to its valuation

Even with the significant decline in its share price, Ocado still has a market cap of £4.1bn. To put this in perspective, J Sainsbury made a profit before tax of £854m in 2022, but it’s valued at £4.3bn.

Marks and Spencer, which has a joint venture with Ocado, is profitable and has a stock market valuation of £2bn.

One of the lessons I learned from the dotcom crash is that just because a business generates all of its income online, it doesn’t necessarily make it a sensible investment.

No thanks

For these reasons, I won’t be investing in Ocado. Of course, I might regret this.

The board claims to have a “clear path” to generating revenue in excess of £6.3bn and EBITDA (earnings before interest, tax, depreciation, and amortisation) of £750m+ within four to six years.

At the moment, I remain to be convinced.

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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and Sainsbury (J). 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 few weeks ago, I sold my Unilever (LSE: ULVR) shares. I made a tiny profit — and picked up a few dividends along the way — but I felt there were better long-term prospects in the market.

I was becoming increasingly frustrated with the apparent lack of share price growth, and didn’t see much changing over the next year or so.

Share price performance

The Unilever share price hasn’t moved since the start of 2022, and is back to where it was in 2017.

In 2021, both revenue and operating profit were lower than they were four years earlier. The UK’s third-largest listed company appeared to be stuck in the doldrums.

Nelson Peltz

Although I welcomed the appointment to the board of Nelson Peltz, the billionaire activist investor, I felt it would be a long time before his impact became visible.

As a director of Procter & Gamble, Peltz is credited with introducing several structural changes which, during his four-year tenure, saw the share price increase by more than 40%.

Peltz believes Unilever has become a “suffocating bureaucracy“.

However, Unilever generates most of its income from well known brands (such as Marmite, Lynx and Dove) and in these cost-conscious times, I felt consumers would shun these for less expensive labels.

The Chief Executive of Tesco, Ken Murphy, recently observed that shoppers were “watching every penny to make ends meet“.

Shareholder returns

I also felt that the company’s dividend policy was a little mean, with its yield being slightly below that of the FTSE 100 average. Unilever is part way through a €3bn share buyback programme, but I prefer cash in my hand.

I therefore decided to sell. But then, along came Kwasi Kwarteng, and the now infamous mini-budget.

The result was a week of turmoil in the financial markets, with the pound crashing to an all-time low against the dollar, and the FTSE 100 falling by nearly 4%.

However, amid all the doom and gloom, Unilever’s share price went up by 1.3%.

Regrets

That’s why I have seller’s remorse.

The way in which the share price bucked the market, reminded me of its great defensive properties.

Unilever generates a significant proportion of its revenue in dollars — more than half of its sales come from outside Europe — but reports its results in euros. This means the company benefits from a strong dollar.

For the same reason, as a UK investor, I can be protected against a weaker pound.

In addition, the consumer giant with a £100bn market cap, generates nearly 60% of its sales in emerging markets, where growth is likely to be faster than in more established territories.

And although Unilever’s products might be more expensive that those of some of its rivals, shoppers do have a loyalty to their favourite brands, even when cash is tight.

A lesson learned

So, what has this experience taught me about investing? Think, think, and think again.

The proceeds from selling my shares have gone on something else, so I’m unable to invest once more. As the old saying goes, act in haste, repent at leisure.

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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco 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.

The JD Sports (LSE: JD) share price has fallen by 10% over the past month. Does this represent a great buying opportunity for me, or is it a sign of something more serious?

The recent share price fall is the continuation of a longer-term decline. Since the start of January, the company’s shares have more than halved in value.

This isn’t surprising given that JD Sports is vulnerable to an economic slowdown, particularly in the UK and Ireland, where it generates over 40% of its sales.

But JD is the UK’s largest sports fashion retailer and is something of a success story. It has grown rapidly in recent years. Sales were £3.2bn in 2018 and are likely to exceed £9bn in 2022. This growth helped the share price treble between January 2019 and December 2021.

Like the trainers it sells, the company has moved with the times. Although it has 3,400 stores, over 40% of its sales are generated online.

Board changes

Earlier this month, investors reacted badly to the news that CFO Neil Greenhalgh was to stand down in 2023.

Despite the promise of a “smooth transition to a new CFO“, and the board insisting it was business as usual, the company’s shares immediately plummeted in value, and closed over 9% down.

To me, wiping nearly £500m off the value of JD Sports seems to be an over-reaction. Greenhalgh will help pick his successor (and should be in the mix for any future FTSE 100 CFO vacancy that might arise).

However, board changes make investors nervous, and his departure follows that of Peter Cowgill, who stood down in May as Executive Chairman.

What about the financials?

Last month, the company released its results for the 26 weeks to 30 July. These revealed a £532m increase in revenue to £4.4bn, but a £64m fall in operating profit to £333m.

Encouragingly, the gross profit margin was unchanged at 48.5%. This shows that, despite rampant inflation across its supply chain, JD Sports is able to pass on rising costs to its customers.

However, selling and distribution expenses were 14% higher, and administrative expenses were up 11%, when compared to the same period in 2021.

Should I invest?

So where does that leave me? There are a number of concerns I have about investing.

Future expansion is going to be difficult. The company was recently ordered by the Competition and Markets Authority to sell Footasylum, which operates 63 UK stores, on competition grounds (that it — and some analysts — disagreed with).

According to a report on news site Fashionnetwork.com, the average teenager owns six pairs of trainers. With younger people more likely to be affected by the cost-of-living crisis, will they want to buy more?

Also, JD Sport’s dividend yield is paltry. Last year the company paid 0.35p per share which, if repeated this year, implies a yield of less than half a percent. This is unlikely to change soon, with the board intending to restrain dividend growth to help fund “ongoing growth opportunities“.

Finally, as for most retailers, a successful Christmas is going to be vital for JD Sports. With gathering economic headwinds, I fear retailers are heading for a bleak winter.

I’m therefore not going to invest. Instead, I’ll wait until the New Year before reviewing the situation again.

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James Beard 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.

Since the beginning of January, the Taylor Wimpey (LSE:TW) share price has fallen by 45%. Against a backdrop of rising interest rates and a cost-of-living crisis, investors appear to have fallen out of love with Britain’s fourth-biggest builder.

A sell-off too far?

But, has the sell-off gone too far? Taylor Wimpey’s shares are now lower than they were in March 2020. That was the start of the coronavirus pandemic when Boris Johnson told the nation to stay at home and Britain’s construction workers downed tools for a period.

Despite the recent steady flow of disappointing economic data, surely things aren’t that bad?

Half-year results

Well, Taylor Wimpey’s half-year results weren’t all doom and gloom.

Although revenue was down 5.4% to £2.1bn, operating profit was up 0.1% to £425m.

Encouragingly, despite inflation in the building sector running close to 10%, Taylor Wimpey managed to increase its operating profit margin from 19.3% to 20.4%.

Looking forward

The future looks positive with the company’s order book worth £2.8bn. Taylor Wimpey also has a land bank of 88,000 plots.

The board expects full-year operating profit to be at the top end of the current market consensus range.

Cladding

However, investors have been nervous about the impact of the cladding crisis on the construction sector.

Taylor Wimpey has signed the government’s Fire Safety Pledge for Developers. This means the company will have to pay for the replacement of dangerous cladding, but this is now fully provided for in the accounts, and there should be no more bad news on this front.

The recent dramatic fall in the share price has increased the dividend yield to an impressive 10%. The firm has also concluded a £150m share buyback programme.

Caution

But, there’s one warning sign that makes me a little nervous.

In her upbeat statement, which accompanied the half-year results, CEO Jennie Daly said: “There remains good availability of attractively priced mortgages.”

But, that was in August. Since then, Kwasi Kwarteng has delivered a mini budget that sent markets into turmoil. Nearly 2,000 mortgage products have since been removed from sale.

I doubt whether Taylor Wimpey’s boss would be able to repeat her statement now.

Government policy

However, the government has said it’s intending to reform the planning system, making it quicker to get new developments built.

There’s even talk of a replacement for the Help to Buy scheme, which is intended to help first-time buyers get on the housing ladder. The present scheme is due to end in March next year.

Stamp duty cuts have also been promised, although current government turmoil means the situation could change.

What am I going to do?

Investing is all about the long term and, right now, Taylor Wimpey’s shares do look cheap.

However, I already own shares in Persimmon, Britain’s biggest builder.

The Persimmon share price has also fallen by 45% this year, and I’m nursing some paper losses. Investing in Taylor Wimpey would mean too much of my portfolio being concentrated in one sector.

So, although I think there’s money to be made from Taylor Wimpey, because of my shareholding in Persimmon, I’m not going to buy at the moment. Otherwise, I would be including the stock in my portfolio.

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James Beard has positions 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.

With the Tesco (LSE:TSCO) share price down by 21% this month at the time of writing, is now the time to bag myself a bargain, and invest in Britain’s biggest grocer? It has just released its half-year results, presenting me with an opportunity to assess the company’s prospects.

Financial performance

Although Tesco’s sales (including fuel) increased by 6.7% to £32.5bn during the six months to 27 August 2022, adjusted operating profit fell by 9.8% to £1.3bn. Despite this, the full-year profit guidance remains unchanged, albeit more towards the lower end of expectations.

Chief executive Ken Murphy blamed inflation for the decline in profitability and noted that customers are “watching every penny to make ends meet”.

Tesco announced a 20% hike in its interim dividend to 3.85p per share. If the final dividend is increased by the same amount, this would give a yield of 6.5% — well above the FTSE 100 average of around 4%.

The supermarket is also part way through a £750m share buyback programme.

Competition

But, Tesco is facing fierce competition.

Everyone can see the impact that discounters, like Lidl and Aldi, are having on the £200bn UK grocery market. These two German supermarkets now have 1,900 stores between them, and a combined market share of 16%, compared to Tesco’s 27%.

Last month, Aldi replaced Morrisons as the UK’s fourth biggest supermarket. Tesco is seemingly so worried that it has introduced the “Aldi Price Match”.

Lidl’s former UK boss, Ronny Gottschlich, has predicted that both Aldi and Lidl will overtake Tesco’s market share by 2027.

And it’s not just traditional supermarkets that are threatening Tesco. Retailers like B&M, Home Bargains and Poundland are selling more discounted groceries than ever before.

However, in the face of this competition, Tesco has fared slightly better than its rivals.

Over the past five years, Tesco’s market share has fallen by 1.2 percentage points compared to 1.9%, 1.8% and 1.5%, for Sainsburys, Morrisons and Asda, respectively.

But there is clearly a shift away from the more traditional supermarkets towards the discounters.

Growth

So, how is Tesco going to arrest this decline?

Growth through overseas expansion does not appear to be on the agenda. In 2021, Tesco’s board took the strategic decision to close its international wholesale arm in Europe, the Middle East and Australia. It also sold its stores in Thailand and Malaysia for £8bn.

Perhaps in a few years’ time, Tesco will merge with one of its smaller UK rivals? However, the UK’s Competition and Markets Authority may object to this.

Tesco Bank was started in 1997, as a means of generating an additional income stream. Today, the bank contributes 5% of operating profit and seems unlikely to grow significantly.

Strategic drivers

Instead, Tesco has established six “strategic drivers”, hoping to create long-term value for its shareholders.

These drivers include financial targets like reducing costs, improving cash generation and achieving a 4% operating margin. In addition, there are less well-defined objectives, like wanting to serve shoppers better every day, maximising value from the company’s property portfolio and innovating.

Although uncontroversial, none of these appear to be particularly ambitious, and do little to reassure me that Tesco can arrest a seemingly long-term decline.

What am I going to do?

I am therefore not going to invest in Tesco. Instead, I’m going to shop around for better bargains.

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James Beard does not have a position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value, Sainsbury (J), and Tesco. 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.

What are they?

Ocado describes itself as “the biggest grocery retailer of its kind in the world”, and hopes to take advantage of the long-term trend towards online shopping. Its Ocado Retail business is a joint venture with Marks and Spencer. Ocado says it has over 800,000 active customers.

BT claims to be “supporting customers to live, work and play together better”. Its consumer division boasts of 30m mobile and fixed broadband customers in the UK. BT also has another 1.2m business users.

What about their financial performance?

Ocado announced a loss before tax of £211m in its half-year results published in July, compared to BT’s profit of £482m in the three months to June.

Ocado has never paid a dividend.

Since it floated in 1984, with the exception of one year due to the pandemic, BT has always declared a dividend. BT’s yield is currently nearly 6% — well above the FTSE 100 forward-looking average of 4.1%.

Ocado reported revenue of £1.3bn in the 26 weeks to 29 May 2022, down 4% compared to a year ago. The company moved from a net cash position of £189m at May 2021, to having a net debt of £759m 12 months later — a swing of £948m.

BT’s sales rose by 1% to £5.1bn in the three months to June 2022, and its net debt increased by £325m compared to a year earlier.

Are they dirt-cheap?

So, are either of these shares dirt-cheap?

Ocado and BT have come onto my radar because of the recent dramatic fall in their share prices. But what is their underlying value?

Warren Buffett once said: “Price is what you pay. Value is what you get.”

A company can be valued based on either its assets or its future expected cash flows.

Ocado has only made a profit three times in 22 years, making it difficult to assess its earnings potential. Ocado’s current market cap is roughly three times that of its net assets of £1.6bn. To my surprise, Ocado has a stock market valuation equal to that of J Sainsbury.

BT has a track record of profitability. It’s current price-to-earnings ratio is seven, and is much lower than its FTSE 100 peers. BT had net assets of £15.3bn at the end of March, approximately 18% above its market cap.

Who wins?

So, if I had to choose between these two shares, BT would win hands down.

I am not alone.  

French billionaire Patrick Drahi appears to see potential in the telecoms giant, having quietly increased his stake to over 18% in recent months. Furthermore, the UK government has waived its previous objection — on grounds of national security — to Drahi’s interest.

But, I am not going to invest in either Ocado or BT at the moment.

It doesn’t seem right to me that Ocado is valued more like a tech stock than a retailer.

As for BT, I think its current market cap reflects concerns over its growth potential. BT has significant market penetration, and the current squeeze on disposable incomes will affect its ability to increase revenues further.

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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and Sainsbury (J). 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.

Having recently sold some shares, I am now reviewing how much passive income could be generated next year from investing £5,000 of the proceeds. I am a cautious investor, so I am only going to consider shares currently in the FTSE 100.

The idea of passive income — money generated from investing in dividend-yielding shares — is an attractive one. So, what should my strategy be?

Construction

The simplest thing to do, would be to invest all of my £5,000 in the highest-yielding FTSE 100 stock, right?

This is currently Persimmon, which — based on the current share price and, assuming last year’s dividend of 235p is repeated next year — would give an impressive return of nearly 19%.

Persimmon’s dividend is by far the most generous in the FTSE 100, and Britain’s largest builder has a long history of providing attractive returns to shareholders. The dividend yield has been helped by a dramatic fall in its share price – down 53% over the past year.

The fear of higher interest rates and a downturn in the housing market has adversely affected all shares in the construction sector. Barratt Developments and Taylor Wimpey have suffered a similar fate to Persimmon, and both yield around 10%.

However, the government has recently announced reductions in stamp duty and is intending to reform the planning system. There also remains a chronic shortage of housing in the UK. This makes me think that builders’ shares are currently undervalued.

However, all experienced investors understand the importance of diversification, and putting all of my money into one stock, or sector, would be a risky strategy.

Instead, I would choose Persimmon, and look for another two stocks in which to invest.

Mining

Companies in the mining sector have traditionally been good dividend payers.

The two obvious candidates here are Rio Tinto and Glencore, with estimated yields in 2023 of 12% and 10%, respectively. Both of these companies declare their dividends in US dollars, which means the recent fall in sterling improves the return for UK investors.

Rio Tinto principally mines iron, aluminium and copper. Glencore’s focus is on copper, cobalt, zinc and nickel. The fortunes of these two mining giants are largely dependent on global commodity prices.

Of these two, I think I would go for Glencore. Although the yield is lower, more of its metals are used in the manufacture of lithium-ion batteries. The International Energy Agency expects the demand for cobalt and nickel to grow by 20 times within the next two decades.

Glencore is also growing. Its revenue increased by 43% during the first half of this year and it generated over $18bn of cash.

M&G

The next biggest dividend payer in the FTSE 100 is M&G, a savings and investment company that operates under the Prudential brand in the UK, with an expected yield of over 8% for next year.

M&G has assets under management of nearly £350bn.

Expected yield

By dividing my £5,000 equally between Persimmon, Glencore and M&G, I could earn over £600 from dividends next year.

That would be a yield of over 12%.

Of course, dividends are never guaranteed. But, by investing in quality companies, it’s possible to generate significant levels of passive income and, hopefully, achieve capital growth as well. 

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James Beard has positions 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.