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