Tesco (LSE: TSCO) shares recently had the distinction of falling to price levels not seen since 2016. For a company as ubiquitous as Tesco, providing goods and services that we all need, that must raise some alarm bells for me. So, what is going on?

The supermarket business is challenging

Tesco’s dominance in the grocery sector is not in dispute. But this does not shield it from the larger challenges it now faces. The competition from lower cost rivals such as Lidl and Aldi are well documented. In fact, these chains reportedly are the fastest growing supermarkets in the UK.

Tesco has said in response that it has worked aggressively to close price gaps across a range of products, as well as imposing a price freeze on more than 1,000 items until 2023.

In my view, such efforts to maintain market share can only come at a cost to the bottom line.

Present economic conditions don’t help

While spending money on food is not necessarily considered discretionary, the present cost-of-living crises within a recessionary environment is bound to influence how much we spend. In fact, supermarkets are already suggesting that the coming Christmas period will not be “normal”. Consumer confidence is certainly impacting sales.

Such an operating environment accounts for a 64% drop in profits for Tesco in the first half of 2022, against a backdrop of rising costs, falling margins and inflationary pressures.

So, what is the upside?

I do believe that it is too early to dismiss Tesco as a potential investment for my portfolio. There is room for some optimism.

It is, despite poor trading conditions, on a more stable financial footing than many of its rivals. Its strong cash position implies it is better suited to outlast a price war. Then combine this with its enormous scale of operations and the subsequent buying power it enjoys with its suppliers.

Additionally, it has an effective loyalty system via its Clubcard membership. An impressive 20 million customers benefit from reduced prices on many products. Tesco has achieved this while also being particularly effective at capitalising on the growing online grocery business and now enjoys a 39.5% share in the UK.

Finally, the directors themselves have been buying stock in some volume. This to me indicates a vote of trust in their own company.

Potentially both a growth and an income stock

I do not know when the share price will recover, but I am assuming that most of the bad economic news has already been priced in. In the meantime, Tesco continues to maintain its policy of paying half its profits to shareholders. Presently the dividend yield sits at 5.12 % with a dividend cover of around 2.01. To my mind that could be an acceptable return while I wait patiently for the stock to perform.

More reading

Michael Hawkins has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

Few price charts I find quite as disheartening as that depicting Rolls-Royce (LSE: RR) shares. The company has endured a dreadful period of declining sales, loss-making divisions, senior management changes and company layoffs. Each time commentators and investors alike have predicted a potential turnaround, they have been disappointed.

So, what is different this time?

Rolls-Royce has invested vast amounts of capital to become one of the world’s largest aero-engine makers. It now enjoys some 50% of market share, mostly for wide-body aircraft. Surprisingly, Rolls-Royce sells its engines to airlines for a loss. The profits come from lucrative long-term service agreements where the company gets paid for each hour the engine is in the air.

The pandemic has meant that aircraft manufacturers have halted or delayed bringing new aircraft types to market. Consequently, Rolls-Royce does not have to spend resources designing and manufacturing new engines. Rather, I conclude, it can now enjoy the benefits of a resurgent demand for air travel with less capital expenditure deployed on expensive research and development.

But it’s not all about engines

There are other facets of the Rolls-Royce product line that I see as benefiting from global macroeconomic trends. Building on its experience of manufacturing nuclear reactors for submarines, Rolls-Royce is ready to bring that expertise to constructing small modular nuclear reactors that cost a tenth of more conventional nuclear power stations. With many nations striving to pursue a zero-carbon energy policy, nuclear power is now enjoying a revival. Rolls-Royce claims its first “mini-nuke” could be online by the early 2030s.

Similarly, its defence arm is set to benefit from an increasingly unstable world.  As a leading supplier to governments on both sides of the Atlantic, I see these long-term contracts guarantying steady cash flow into the company.

Let’s not lose sight of the challenges

Despite all the positive signs for a potential turnaround, I must remind myself that Rolls-Royce still faces the same challenges many other companies do, namely cost inflation and supply chain disruptions. Additionally, this is a company that is not paying any dividends. In fact, it is barred from doing so until at least 2023 as part of its loan terms. Therefore, I am reliant on capital gains should I choose to invest.

If this is the beginning of a Rolls-Royce renaissance, I want to be a part of it

To my mind, this historic company continues to push boundaries in terms of engineering, technology, and design. The fact that it continues to do so despite all the challenges it has faced is testament to its heritage. I do not know if its share price will now recover, but I do know that I want to buy when it does.

More reading

Michael Hawkins 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.

Back at the beginning of the year there was plenty to like about Royal Mail shares. The company was making money, and the dividend pay-out was healthy. Crucially, too, the company was debt free with good cash reserves.

Introducing International Distribution Services

On October 4^th, the holding company of the Royal Mail Group officially changed its name to International Distributions Services (LSE: IDS). This name change occurs against a backdrop of a far more challenging time for the company. This is dominated by worsening labour relations, as the management continues to try to introduce efficiencies. There’s also inflationary pressures, including rising fuel costs.

As I write this, a further 19 further days of industrial action is due to start. Possible job losses of 6,000 staff by March 2023 have been indicated as well. International Distribution Services is concerned that ongoing strike action will continue to erode its customer base. Consequently, the Board suggested in its most recent trading update that operating losses for the year could tumble to between £350m and £450m . The share price has reacted accordingly. It is now down some 64% since the start of the year and is approaching its pandemic lows of March 2020.

So what is the good news?

Given the dire trading conditions, why am I even looking at possibly investing in this company? The answer lies with its profitable Global Logistical Services (GLS) operation in Europe and N. America. This division focuses purely on parcel delivery, which continues to thrive, contrasting markedly to a declining letter-delivery business.

In the past, profits from GLS have been used to offset the losses at Royal Mail. The management is now suggesting that the formation of International Distributions Services might allow them to implement “clear financial separation with no cross-subsidy”. Given that in its latest update GLS was reported to be on track to deliver an operating profit of £320m-£354m, that separation is looking increasingly more likely.

How much of this talk of breaking up the company is designed to bring a unionised and reluctant workforce to the table, I can only speculate on. However, I am aware that potentially there could be an opportunity soon to buy up shares of International Distributions Services at heavily discounted prices.

Is it time to buy?

Now does not seem to be the time to invest, however. Talk of further industrial action and redundancies continue to dominate the narrative. The company has said that it is unable to give a clear outlook for the current financial year. That is going to deter potential investors. But I am keeping my eye on future developments and any possible catalyst for a reversal in the share price.

More reading

Michael Hawkins 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.

I imagine there would be many investors that would be wary of the property and construction industry. And they would have every reason to be. However, I do believe the Taylor Wimpey (LSE: TW) share price is worthy of careful consideration. To my mind further downside is limited, but potential upside could be substantial.

Headwinds abound

To be clear, there is little by way of positive news in the housebuilder sector. It is important to summarise some of the many factors that are reflected in share price’s poor performance.

Construction costs are rising. Supply chains are still not back to their usual pre-pandemic efficiency. Raw materials such as lumber, bricks and cement remain at elevated prices. Material cost increases of up to 24% are quoted by the industry.

This is further exacerbated by shortage of labour, skilled and otherwise. This drives up wages as well as delaying completion dates, which can carry financial penalties.

On the demand side, we see a customer base that is reluctant to commit to more expensive mortgages on account of rising interest rates and a general inflationary increase in the cost of living. The ability to pass on increased costs to the customer is therefore limited.

Any bright spots at all?

The main consideration here is that most of these threats to the industry have already been priced into the share price. Therefore, I am taking the view that any possible improvement in economic conditions, however fleeting, should be immediately reflected in a rising share price. What that might be is harder to quantify. It could potentially be a slowing or even a stall in interest rate rises or inflation. Or a softening in commodity prices, for example.

Should that occur, I believe Taylor Wimpey is well positioned to benefit. Its cash position, for instance, is strong. Consequently, it has the necessary reserves to add to its landbank at more competitive prices when the opportunity presents.

An income favourite

I believe that the most compelling argument for Taylor Wimpey’s future performance is that it is already a favoured income stock. Its declared interim dividend of 4.62p is up 8% from last year.

With a healthy dividend cover of 2.10, there is more than sufficient cash flow in the company to cover these dividends. Additionally, with a present inflation-busting dividend yield of 9.22%, I am going to assume this stock is going to be on many investors’ shopping lists. 

Therefore, my hypothesis is that as soon as we see some economic tailwinds, Taylor Wimpey will be one of the main beneficiaries of new funds flowing into a revitalised housebuilding sector. As such, I think it is time to commit some of my funds to this stock. And perhaps add further on any evidence that the current economic malaise may be changing for the better.

More reading

Michael Hawkins 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.

Using the dividend yield

One popular metric for finding profitable income stocks is the dividend yield. This is the value of the annual dividend per share divided by the current share price.

Many of those companies that I associate with reliable dividend payments are hitting or approaching their share price lows for the year. These would include the likes of Persimmon, Abrdn and Rio Tinto. Considering that the share price is the denominator of the dividend yield equation, then lower prices do imply that this could be an excellent opportunity for me to buy these stocks at superior yields. For example, Persimmon, Abrdn and Rio Tinto presently offer an eye-watering dividend yield of 20%, 10.88% and 11.8% respectively.

Not the full story

The problem with this is that it is a one-sided argument. It assumes that the annual dividend per share is maintained or only adjusted slightly. Given the challenges presently faced by many companies, that is a significant assumption. The fact remains that an increasing dividend yield may be singularly due to a falling share price rather than any superior commercial performance.

Dividend yield should not be viewed in isolation

Take housebuilders, for example, which often feature prominently as popular income stock investments. The headwinds faced by such companies currently are significant and include rising material costs, shortage of labour and rising interest rates in a recessionary environment. It is hardly surprising that investors have been abandoning such stocks in droves.

So, while these stocks may appear to be discounted, further analysis suggests they may yet be discounted further. I won’t be buying any of the above three companies for my portfolio any time soon.

Pound cost averaging

I do not want to leave a bargain on the table, I am human after all. Fortunately, there is a rational compromise here. If I start to regularly drip-feed smaller investment amounts into these stocks, I am taking advantage of these lower prices while not committing all my capital to a stock that may fall further. This process of pound cost averaging can prove to be an effective way to build up profitable positions in solid companies over the longer term.

Additionally, I need to consider other fundamental metrics than simply dividend yield. Dividend cover, for example, can be a useful indicator of how affordable a company’s dividend pay-out is. This is calculated by taking the earning per share value and dividing it by the dividend payment per share. Any value of 2 or more is considered sustainable.

More reading

Michael Hawkins 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.

It’s easy for me to feel somewhat despondent over the state of the economy and the performance of my portfolio at present. Yet there is one driving macro-economic factor that suggests to me that some stocks listed on the FTSE 100 could benefit.

It all comes down to exchange rates

The British pound has struggled and is presently at lows not seen since 1985. The real story here, however, is the increasing strength of the US dollar. This reflects the US Federal Reserve leading the way in raising interest rates, causing capital to flow to the dollar. A strong dollar is detrimental to companies that must pay for their raw materials in dollars, and therefore increases their costs that must then be passed onto the customer.

However, the FTSE 100 is full of companies that export products and services overseas, and the weak pound makes their goods more attractive. One such company would be BAE Systems. Not only does it benefit from a weaker pound but also operates in an environment where defence spending is expected to remain robust given current geopolitics.

Energy and commodities are likely to benefit the most

Another consideration is those companies that earn a significant proportion of their revenues overseas, and those profits are then repatriated back to the UK and converted to pounds. Oil and gas companies are obvious examples of this, as are mining and natural resource stocks. The benefits of favourable currency exchange can be significant.

Consider the performance of Shell and BP. Both have seen their share price hold up well against the broader indices. At first glance, this may appear odd when compared to the sustained dip in the oil price we have seen since June. But oil is priced in US dollars. Convert it to pounds and that share price appears justified.

The same case can be for the large mining stocks, several of which feature in the FTSE 100. Glencore has recently announced record profits plus a special dividend for investors on the back of strategic commodity investments. Continued elevated energy prices should continue to contribute to its already strong cash position.

Similar observations can be made in the precious metals sector.  The prices of silver and gold have had a torrid time recently. The share price of precious metal miner Fresnillo, on the other hand, has failed to participate in the downturn.

One note of caution

The energy sector has had a lot of media attention recently, and there is persistent talk of windfall taxes on the most profitable companies. While the present political climate suggests further tax rises on such companies are unlikely, it is something I must keep an eye on.

Investing is seldom two dimensional

What I have had to learn as an investor is that it is all too easy to get caught up in the bad news when, in fact, negative headlines can — in some cases — mask an investment opportunity.

More reading

Michael Hawkins has a position in BP. 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.

To be clear, Britvic (LSE: BVIC)’s present dividend yield of 2.95% is hardly going to set the world alight and gets nowhere close to beating that present inflation rate, but I do believe there is plenty to like about this company.

Firstly, using the numbers from last year’s income statement, we have an earnings per share of 44.3p and dividend payment per share of 24.2p. Dividing one by the other provides a respectable dividend cover value of 1.83. This implies that this level of dividend is perfectly sustainable and well covered by earnings.

An interim dividend payment that was paid in July 2022 (7.80p) showed a 20% increase over the same period in 2021, again suggesting the company is on the right track. The latest Q3 update reported an 11.2% increase in revenues on the same period last year.

In 2020 Britvic signed a 20-year franchise bottling agreement with another soft-drink giant PepsiCo. This includes the production, distribution, marketing, and sales of soft drink brands that include Pepsi, 7UP and Mountain Dew.

Personally, I would be quite comfortable investing in this company that manufactures and distributes such well-known brands, even in this economic climate.   I would expect that the soft drink business would remain a consumer staple while more discretionary spending continues to deteriorate.  The CEO himself is quoted as saying that soft drinks fall into the “resilient” category.

I am aware that Britvic has a presence in Europe, which may be facing even more economic challenges than here in the UK, but am excited by its growing presence in Brazil. It appears that by holding shares in this company I get some emerging market exposure as well.

The company has stressed that it can mitigate the worst of the inflationary pressures that are facing all manufacturers. How it will be able to deal with rising energy costs in particular is less clear. Reassuringly, it describes its supply chain model as “robust”.

While the share price has languished somewhat over the past 12 months by around 16%, my focus here remains one of reliable income and capital preservation rather than capital gains. Therefore, I continue to watch this price action with interest looking for an opportune moment to add Britvic to my portfolio.

More reading

Michael Hawkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Britvic. 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 euphoria of rising prices off the June lows seems to have stalled while talk of recession and general economic malaise has increased. Timing the market does not seem a sensible option for me. I need to ensure that my portfolio includes stocks where capital preservation is prioritised if this market does indeed continue lower. The Ruffer Investment Company (LSE: RICA), listed on the FTSE 250, has an investment strategy that appears to meet that objective.

A quick check of the Ruffer Investment Company website provides a convenient summary of its investment aims — namely to provide “consistent positive returns, regardless of how financial markets perform”.

It also goes on to claim that it tries not to lose investor’s money in any 12-month period. Its performance figures to date appear to bear that out. Over the past five years, Ruffer Investment Company has consistently shown a greater cumulative performance than the broader FTSE 250 index. Crucially it has managed that without the amount of volatility I often experience with other investments.

Given the prevailing economic climate, these objectives are particularly appealing to me, although I am conscious that I already hold Capital Gearing Trust in my portfolio, which operates along similar investing principles.

But investing conditions at present appear challenging to say the least. I do not know if we are facing a prolonged recession nor even a significant market correction. I do know from observation that market sentiment is lower than it has been for a while.

Therefore, adding more weight to my portfolio that prioritises capital preservation over capital gain seems prudent to me and am happy for my investments to reflect that.

Ruffer Investment Company is a multi-asset investment trust, which means that the fund managers can provide exposure to several asset classes that they believe meet the fund’s overall objectives. The bulk of these assets are inflation-linked government bonds, both in the US and the UK. This reflects a view that the managers have held for some time — correctly as it has turned out — that inflation will remain higher than the savings rate. Importantly these bond holdings are then hedged via credit default swaps to protect against potential default.

Similarly, derivatives are in place (via the options market) to provide insurance against falling share prices. These additional layers of financial protection again emphasise the focus on capital preservation.

The fund has exposure to the gold price (a 4.8% weighting) as well as other commodities. At present, this sector is under pressure due to both waning demand and a rising US dollar. However, I am comfortable with exposure to this asset class that could start to perform should inflation figures appear to plateau in the future.

Ruffer Investment Company may appear expensive, trading at a 12-month average premium of 2.82%. But this is not a stock that I would try and time an entry. I believe it has earned a place in my investment portfolio now.

More reading

Michael Hawkins has a position in Capital Gearing Trust. 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.

Under the guidance of Bill Ackman, the managers of Pershing Square (LSE:PSH) have been actively buying shares in companies that include Lowes Companies Inc (Home Improvement), Chipotle, Domino’s Pizza and Hilton Worldwide. While the rest of us consider scaling back our restaurant visits and delaying house renovations, Mr. Ackman and his team believe there is plenty of life yet in consumer discretionary spending Stateside.

At present, the Pershing Square share price trades at a significant discount to asset value despite its impressive run over the last two months. Such performance in the face of poor economic data could reflect a belief that the US Federal Reserve will in fact be able to engineer a soft landing and consequently will be able to slow or even reduce interest rates faster than the prevailing consensus.

Time will tell. Recent comments from Jerome Powell do admittedly make that soft-landing scenario look less likely.  But bearing in mind that share prices are there to reflect future earnings, not present, and that the US tends to lead the prevailing cycle, Pershing Square may prove to be fortuitous buy for me.

Mr. Ackman has enjoyed a colourful investing career and has certainly made some calls that missed rather spectacularly. Shorting the US supplement maker Herbalife is one such example. But the Pershing Square of today is a different company, no longer the aggressive hedge fund, but practitioners of the more longer-term, more sustainable principles of ‘buy and hold’ investing. This is a transition that Mr. Ackman himself is keen to stress, even stating that some of investments are in businesses where an “exit will not be required”.

Interestingly, however, he is understood to have made significant sums for the fund in the derivatives market, using more complex financial instruments that profit from the expectation of higher future inflation and interest rates. Such practices reflect those skills and behaviour of the former hedge fund manager. Considering the relatively low amount of capital involved in such trades (1.4% has been quoted), this appears to me to be an acceptable risk-to-reward strategy that has the benefit of muting the worst of the economic news.

I have not yet decided if Pershing Square deserves a place in my portfolio. I am certainly going to keep it on my watchlist and take another look at it when I feel more confident that consumer sentiment is on the rebound.

More reading

Michael Hawkins 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.