FTSE 100 shares are interesting, but there are three that have really been on my mind recently. I’ve been weighing up the positives and negatives of adding each of them to my ISA.
HSBC
Over the years, HSBC (LSE:HSBC) has lost its grandeur. It is no longer the giant of FTSE 100 shares it once was. It has started to withdraw from the US to focus on Asia, and is cutting more than 30,000 jobs.
Low interest rates mean that the company (like all banks) is struggling to make money. Plus, any further fines – like the $1.9bn it was forced to pay in 2012 – could be a serious setback.
However, HSBC’s focus on Asia makes sense. 42% of its capital is there, and more than 80% of its profits came from the region in 2019. Interest rates are a problem, but a potential rise in the future would be a huge boost. And you’d hope it had learned its lesson from that previous fine…
I also think the company is undervalued, making it one of my favourite long-term FTSE 100 shares. Its price-to-book ratio is currently 0.6. Rupert Hargreaves and I are in agreement that this is too cheap.
As such, I think this is a good opportunity for me to buy and hold for the long term.
British American Tobacco
I don’t view British American Tobacco (LSE:BATS) with the same mindset. With many consumers becoming more health-conscious, I can see the tobacco industry declining hugely in many years. Plus, ethical concerns are enough to put many investors off immediately.
Nevertheless, this is one of the FTSE 100 shares I am most keen to keep an eye on. Over the last five years, the company has increased its profits by almost 50%. At the same time, it has engaged with secondary markets (vaping, etc.) better than its closest competitor, Imperial Brands. The company even currently offers an enticing dividend yield of 7.8%.
Of course, investment in British American Tobacco is still a risk. Its share price is down almost 50% compared to four years ago, and talk of restrictions in the US on the amount of nicotine that cigarettes can contain pushed its price from 2,900p to 2,700p in a single day less than two weeks ago.
Rolls-Royce
The travel sector took a huge hit during the pandemic, with activity at Rolls-Royce (LSE:RR) hitting a brick wall.
For the company to begin a strong recovery, flying hours need to return to normal. It has forecast free cash flow of $750m by 2022 assuming 55% of 2019’s flying hours. This is ambitious, but if it is able to hit this target, then things should be looking up. Plus, with more flight hours, there will be more opportunities for Rolls-Royce to work on engine maintenance.
If it isn’t, then we could see a further decline in a share price that has already dropped by 65% since April 2018.
Add the potential for further lockdowns and the looming issue of the company’s debt – currently £3.6bn – and Rolls-Royce becomes one of the riskiest FTSE 100 shares.
I’m convinced that HSBC will be great for my ISA, but British American Tobacco and Rolls-Royce are still a little too risky for me at the moment.