BP

I have huge reservations over buying oil producers like BP (LSE: BP). The world is transitioning rapidly from fossil fuels to renewables and alternative energies. The world’s majors have a long way to go as part of this transition to replace their oil and gas revenues.

But then the company could potentially deliver explosive profits growth in the short-to-medium term, as Shell’s third-quarter update shows. Adjusted earnings doubled year on year to $9.5bn thanks to higher crude prices.

As a result, Shell announced plans for a $4bn share buyback programme. It also hiked the quarter three dividend to 25 US cents per share.

The trouble for BP and Shell, however, is that this outstanding profits growth has amplified calls for a windfall tax. This could end up costing the FTSE 100 firms billions of pounds. The UK government has said that all options remain on the table as it aims to rebuild public finances.

Furthermore, it’s not certain that crude oil prices will remain close to $100 a barrel. The OPEC+ group’s decision to cut production has helped black gold values remain at current elevated levels. But the cooling global economy means that a slump in oil demand might not be far away.

BP’s slight forward price-to-earnings (P/E) ratio reflects this uncertain outlook. For 2022 it carries a multiple of just 3.9 times.

So I’m happy to ignore the oil stock and its 4.3% dividend yield for now.

The Berkeley Group

Like BP, The Berkeley Group (LSE: BKG) has a dividend yield that beats the 4% FTSE 100 average.

At 4.5% the company’s reading is a clear distance above the British blue chip average. On top of this, the housebuilder trades on a forward P/E ratio of just 8.7 times. It thus provides great all-round value on paper.

The housing sector outlook over the long term remains robust in my opinion. However, uncertainty over Berkeley’s profitability (and thus dividend prospects) in the more immediate future means I’m not investing for the time being.

Promisingly for Berkeley, demand for city homes is increased as people flock back following Covid-19 lockdowns. According to Halifax, average home values in UK cities rose 9.2% between January and September.

This is good news for Berkeley which is focused on London and the South East. The problem, however, is that a broad slump in home values is possible as interest rates soar and the domestic economy struggles.

At the same time costs for the homebuilders looks set to keep growing. Shortages of raw materials and increasing wages are all adding pressure to these companies’ bottom lines.

I already own a raft of FTSE 100 housebuilders in my own portfolio. But until the demand outlook becomes clearer I’ll be looking to buy other UK shares to boost my dividend income.

However, not all of the companies in the FTSE have benefited from this strong support. Today I want to look at three unloved companies I think could be bargain buys at current levels.

#1: DS Smith promises 6% yield

Shares in packaging group DS Smith (LSE: SMDS) have fallen by 40% over the last year as investors have priced in the risk of higher costs and a slowdown in demand.

However, CEO Miles Roberts recently said that trading since May has been in line with broker forecasts, despite rising raw material costs and higher gas prices.

According to Roberts, the company has been able to pass on most increases by raising its packaging prices. Hedging arrangements have also helped to limit the impact of high energy costs.

Roberts says that he remains confident in the outlook for this year and expects “a significant improvement in performance”.

Broker forecasts currently price DS Smith shares on just eight times forecast earnings, with a 6% dividend yield. Although falling demand is a risk, I think this could be a good time to buy.

#2: Berkeley should be a long-term winner

My next pick is upmarket housebuilder Berkeley Group (LSE: BKG). This business has an impressive record of timing market cycles successfully, so I tend to pay attention to its trading reports.

In its latest update, Berkeley said sales were running ahead of the same period last year. Strong demand for the firm’s new homes — which sold for an average of £600k last year — has allowed the company to raise its selling prices to cover higher costs.

Berkeley’s pre-tax profit is expected to hit £600m in 2022/23. This should continue to support the company’s policy of returning £282m to shareholders each year through share buybacks and dividends. That’s equivalent to a 7% return at the current share price.

The big risk here is that the UK housing market will suffer a more serious downturn than expected. If housing transactions slow right down, then Berkeley’s profits could slump.

Personally, I’m comfortable with this risk. I think this FTSE 100 share offers good value at current levels.

#3: ABF’s household names look safe to me

My final pick is family-controlled food and fashion group Associated British Foods (LSE: ABF).

This unusual business owns the Primark fast-fashion chain, as well as a wide range of food businesses. Popular ABF grocery brands include Twinings, Silver Spoon, and Blue Dragon.

Food sales are performing well this year, with profits ahead of expectations.

However, profits from Primark are expected to be lower, despite a recovery in sales. High energy costs and the strong dollar are causing costs to rise. Rather than hike prices, ABF has opted to accept lower profit margins in order to protect its market share.

This news caused ABF’s share price to fall to a 10-year low. However, my feeling is that this is probably a buying opportunity.

ABF has plenty of cash and can afford a short-term hit to profits. With the stock trading on just 10 times forecast earnings, I see this FTSE 100 share as a long-term buy.

Improving momentum

Rising interest rates and the increasing cost of living both pose a threat to housebuilders like The Berkeley Group (LSE: BKG).

But despite these pressures the industry has so far remained extremely robust. In fact, home values keep growing by double-digit percentages. According to Halifax, the average UK property price rose 11.5% on an annual basis in August.

Pleasingly for Berkeley too, the market is rapidly improving in London. This is good for the business as it concentrates on home construction in the capital and South East.

The average home price in London hit a new record of £554,718 last month, Halifax said. This was up 8.8% on an annual basis and was the fastest rate of growth since 2016.

6.4% dividend yield

Persistent share price weakness means that Berkeley currently commands a forward P/E ratio of just 8.6 times. This is extremely low, in my opinion, given the ongoing resilience of the market.

The company itself claimed last week that it remains on course to meet profit forecasts for the current financial year to April 2023. It noted that “[a] good level of demand continues to support pricing above business plan levels” and that prices remain “sufficient” to cover increased costs on a business-wide basis.

City analysts believe Berkeley will pay a full-year dividend of 212.4p per share this year. And they think the builder will hike the full-year payout to 221.5p in financial 2024.

As a consequence the firm’s dividend yields clock in at 6.1% and 6.4% for this year and next respectively.

A dividend growth hero

Associated British Foods (LSE: ABF) is another FTSE 100 stock I’d buy for passive income. The food and clothing business raised annual dividends at a compound annual growth rate of 8% in the decade up to the pandemic. And while the company faces some near-term trouble as product costs soar, I expect ABF to deliver stunning earnings and dividend growth over the long haul.

I like this stock because of the enormous potential of its Primark low-cost clothing/lifestyle division. Demand for its cut-price apparel is surging as consumers demand more bang for their buck. And rapid expansion here has the potential to supercharge profits for ABF.

Primark will enter its 15th market later this year when it opens a store in the Romanian capital of Bucharest. The business has also recently launched ‘Click & Collect’ operations to latch onto the e-commerce boom.

As for dividends, City analysts expect a payout of 45.3p per share and 47.6p for the financial years to September 2022 and 2023 respectively. These projections create chunky yields of 3.4% and 3.5%.

Recent share price falls also leave ABF trading on a forward P/E ratio of just 10 times. In my opinion this makes the firm a top dividend-paying value stock to buy.

Recovering travel

On The Beach (LSE:OTB) was battered during the pandemic as demand for holidays understandably dried up. In the past month, however, the shares are up 25%. At the time of writing, they’re trading at 118p.

For the years ended September, in 2020 and 2021, the company reported pre-tax losses of £46.3m and £36.7m. While this shows some improvement, it has still been a very difficult period for the business.

However, for the six months to 31 March, group revenue grew to £52.9m, up from £12m for the same period in 2021. 

Over that time, pre-tax losses also narrowed from £21.6m to £7m. It’s clearly benefiting from more holiday bookings and the relaxation of international pandemic restrictions.

With cash of £14.6m and debt of £3.65m, the firm should be able to navigate its way through any future pandemic variants, should they arise.  

Strong profit outlook

Next, The Berkeley Group’s (LSE:BKG) shares are down 14% in the last three months and currently trade at 3,441p.

For the 12 months to 30 April, pre-tax profit climbed to over £550m, with revenue up 6.6% and earnings per share (EPS) surging over 23%.

It’s worth noting, however, that this growth isn’t guaranteed in the future.

The upmarket housebuilding firm has forecast that profits will continue to increase over the next three years. The value of Berkeley’s land portfolio has also grown over the past year.

Despite this, the company’s cash balance fell by £859m to £269m. There are also worries that rising interest rates will ultimately deter potential homeowners from purchasing, because mortgages will probably become more expensive. This could lead to a slowdown in the housing market more generally.

Hitting calmer waters?

Finally, Carnival (LSE:CCL) shares are down almost 50% in the last six months, and trade at 708p.

The cruise firm had a tough time during the pandemic. For the years ended November, in 2020 and 2021, pre-tax losses came in at $10.2bn and $9.5bn. 

Net debt also spiralled during that time, and currently sits at over $36bn. The business has confirmed it will seek to raise $1bn through the issuance of additional equity. This may be used to pay down some of Carnival’s near-term debt.

On the other hand, occupancy levels hit 69% during the three months to 31 May. In the previous quarter, they were 54%. Additionally, customer deposits rose from $3.7bn to $5.1bn over the same period and booking volumes nearly doubled. 

While the underlying financials are still not as solid as I would like to see, demand appears to be recovering.

Overall, these three firms all face challenges, but there are enough exciting prospects in each to favour investing in them. As such, I’ll be adding all three businesses to my portfolio soon.

Hedge fund manager

Man Group (LSE: EMG) investors have actually had a good five years, with the shares up more than 75% over that period, and up 45% over the past 12 months. But that hides a more volatile longer-term ride, and the price was a lot higher in the mid-noughties.

We’re looking at a trailing P/E of only around 8.4 now. The whole investment management business is depressed, with many suffering outflows of funds, and I do think the risks are high for the rest of the year. But in its first-quarter update, Man reported a $3.1bn net inflow, to reach record assets under management.

Man is also among the companies distributing excess capital via a share buyback programme. And analysts predict a 2022 dividend yield of around 5.5%. Overall, man Group looks like a nice growth buy to me with dividends thrown in. But I do expect volatility.

Housebuilder

I reckon most of the building and construction sector is probably undervalued, as long-term demand for housing seems unstoppable. But I see a competitive advantage for Berkeley Group Holdings (LSE: BKG) in these tough times.

I don’t expect the housing slump that many investors are fearing. Although any lengthy slowdown in house prices could keep the sector depressed for some time. But Berkeley is more of an upmarket builder — it reported an average selling price of £603,000 for the year ended April 2022. That was down from an even higher £770,000 average in 2021, but at this end of the market the property mix can vary considerably from year to year. Berkeley does share the risks of the sector during any potential squeeze, but I suspect its growth potential could be more resilient than most.

Security paper

My final pick is banknote and security printer De La Rue (LSE: DLAR). De La Rue has been in a bit of a transformation phase in recent years, and it’s not through it yet. In May, the company spoke of “headwinds that are anticipated to have an impact on adjusted operating profit in FY23“.

But forecasts suggest a P/E of only around six for the current year, dropping to under five the following year. Why is the company so lowly valued?

The big risk lies in the future of cash. But I don’t hold with these predictions that cash will soon be obsolete. There are huge parts of the world, with the biggest populations, where I just don’t see that as feasible. This is my most speculative growth share pick, and I think it’s also the riskiest. But the shares do look cheap.

All of these shares are risky right now, I think. And I would only buy after doing a good bit more research.

Standing tall

As mortgage rates continue to rise as a result of interest rate hikes, demand for homes has cooled. This can be seen in Rightmove‘s June house price index, which shows that house price growth is slowing. As such, analysts are actually expecting prices to drop, hence the overall weakness among the FTSE 100 housebuilder stocks.

Nonetheless, Berkeley stands out as doing better than its Footsie peers year-to-date (YTD). The shares’ performance becomes even more puzzling when I consider that it’s the only developer not paying a dividend. So, what’s behind the stock’s relative strength (bearing in mind that it’s still down this year)?

Berkeley loves the south

Upon analysing the number of houses built, Berkeley’s more solid stock performance gets even more confusing. The Croydon-based developer doesn’t even rank within the top five builders in Britain for house completions.

However, there’s a metric in which Berkeley excels in — average selling price. Due to the housebuilder’s speciality in building posher, London properties, its average house price is two to three times higher than its competitors.

As a ‘luxury’ builder, Berkeley has been able to pass on most of its higher costs to its customers without impacting demand. This was evident in its FY22 results with management citing resilient demand for its properties.

Moreover, Berkeley’s exposure to London and the South East has allowed it to benefit from higher house prices, with the average house price in the capital costing £530,000. This is almost double of the UK average. More importantly, the lack of supply in these regions will most probably protect Berkeley’s top line from declining house prices.

Built like bricks

Aside from its solid stock performance, Berkeley also boasts a solid balance sheet. Although its debt-to-equity ratio of 21% is slightly higher than that of its FTSE 100 peers, its cash position covers its debt comfortably. Additionally, it’s got the second highest profit margin in the industry, at 20.5%, which is also higher than the industry’s average.

Having said that, it mentioned free cash flow of -£131m in its latest results. This would normally alarm me, but this was down to the company’s recent acquisition of St. William. This free cash flow impact should be a one-off and the board expects positive cash flow ahead. The company sold 42% more homes last year after all, and has an order backlog worth £2.2bn, which is an increase from £1.7bn a year ago.

I think Berkeley could be a lucrative housebuilder for me to invest in, if not for one thing. A great deal of uncertainty lies ahead for the housing market, with a potential recession on the cards, the company may be vulnerable, even with its London exposure. For that reason, I’m not ready to buy Berkeley shares at the moment. Instead, I’ll be scouting for potential winners in the event of a stock market crash.

Lloyds

Lloyds (LSE: LLOY) is one of Britain’s biggest financial institutions. It earns the bulk of its revenue from mortgage loans. This week, a large number of director dealings occurred with Lloyds shares going both ways.

• Name: Charlie Nunn
• Position of director: Chief Executive Officer
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 312,313 @ £0.43
• Total value: £135,843.66

• Name: William Chalmers
• Position of director: Chief Financial Officer
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 149,910 @ £0.43
• Total value: £65,204.85

• Name: Antonio Lorenzo
• Position of director: Chief Executive Officer (Scottish Widows)
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 148,661 @ £0.43
• Total value: £64,661.59

• Name: Antonio Lorenzo
• Position of director: Chief Executive Officer (Scottish Widows)
• Nature of transaction: Disposal of shares
• Date of transaction: 22 June 2022
• Amount sold: 150,000 @ £0.44
• Total value: £65,457.30

• Name: Vim Maru
• Position of director: Retail Group Director
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 148,661 @ £0.43
• Total value: £64,661.59

• Name: David Oldfield
• Position of director: Commercial Banking Group Director
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 145,746 @ £0.43
• Total value: £63,393.68

• Name: Janet Pope
• Position of director: Chief of Staff and Sustainable Business Group Director
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 104,104 @ £0.43
• Total value: £45,281.08

• Name: Stephen Shelley
• Position of director: Chief Risk Officer
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 147,828 @ £0.43
• Total value: £64,299.27

• Name: Andrew Walton
• Position of director: Group Corporate Affairs Director
• Nature of transaction: Free shares
• Date of transaction: 22 June 2022
• Amount purchased: 104,104 @ £0.43
• Total value: £45,281.08

Taylor Wimpey

Taylor Wimpey (LSE: TW) is one of the UK’s biggest residential developers. Both the Taylor Wimpey CEO and Chairman bought a large sum of Taylor Wimpey shares this week. This course of action hopes to shore up investor sentiment amid slowing house price growth.

• Name: Irene Dorner
• Position of director: Chairman
• Nature of transaction: Purchase of shares
• Date of transaction: 22 June 2022
• Amount purchased: 21,750 @ £1.15
• Total value: £25,016.20

• Name: Jennie Daly
• Position of director: Chief Executive Officer
• Nature of transaction: Purchase of shares
• Date of transaction: 22 June 2022
• Amount purchased: 21,509 @ £1.15
• Total value: £24,812.57

Berkeley

Berkeley (LSE: BKG)  is another one of Britain’s biggest housebuilders. The FTSE 100 firm reported a decent set of results this week. However, this wasn’t enough, as the Berkeley share price slid downwards. Nonetheless, a large set of director dealings and institutional buying amounted to millions of pounds in Berkeley shares. This should boost investor sentiment in the long-term, despite slowing house price growth.

• Name: William and Jane Jackson
• Position of director: Non-Executive Director and Person Closely Associated to Non-Executive Director
• Nature of transaction: Purchase of shares
• Date of transaction: 22 June 2022
• Amount purchased: 16,148 @ £36.57
• Total value: £590,566.42

• Name: Robert Perrins and Vanessa Perrins as Trustees of the Robert Perrins Discretionary Settlement
• Position of director: Person(s) Closely Associated to Rob Perrins (Berkeley Chief Executive Officer)
• Nature of transaction: Purchase of shares
• Date of transaction: 22 June 2022
• Amount purchased: 50,000 @ £36.57
• Total value: £1,847,644.75

• Name: Michael Dobson
• Position of director: Non-Executive Director
• Nature of transaction: Purchase of shares
• Date of transaction: 22 June 2022
• Amount purchased: 4,000 @ £36.17
• Total value: £144,686.56

• Name: Julia Barker
• Position of director: Person Closely Associated with Glyn Barker (Berkeley Chairman)
• Nature of transaction: Purchase of shares
• Date of transaction: 22 June 2022
• Amount purchased: 1,950 @ £37.27
• Total value: £72,669.37

Types of shares in a SIP

To provide context, there are a few types of shares within a company’s share incentive plan (SIP). A SIP is an employee plan for companies within the UK to flexibly award equity to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this instance, most of the director dealings at Lloyds occurred with free shares. These shares were acquired by directors under the Lloyds fixed share award scheme. Share award schemes give employees actual shares rather than share options. The value of shares given to directors here are treated as employment income. This means that they may be subject to tax and national insurance contributions. That is unless they opt for an HMRC-approved share scheme, which has its own rules and requirements.

Berkeley (FY22 earnings)

Berkeley (LSE: BKG) is a British property developer and housebuilder. It mainly builds homes and neighbourhoods across London, Birmingham, and the South of England. The company is expected to release its FY22 earnings results for the year ending April 2022 on Wednesday 22 June.

The FTSE earnings preview indicates slight growth, as the housebuilder is expected to have capitalised on higher house prices. Nonetheless, analysts are predicting that if the outlook for FY23 comes in below consensus expectations, Berkeley shares may be in for a tough time.

DS Smith (FY22 earnings)

DS Smith (LSE: SMDS) is a British multinational packaging business. It offers sustainable, plastic-free packaging, integrated recycling services, and sustainable paper products. The firm is expecting to report earnings for the year ending April 2022 on Wednesday 21 June.

Analysts at Jefferies Financial Group recently reduced their EPS estimates for DS Smith. Morgan Stanley, Credit Suisse, and JP Morgan all reduced their price targets as well. So, if DS Smith can beat its earnings estimates and provide a positive outlook, its share price could recover. Otherwise, a further drop in its stock is to be expected.

Safestore (H1 22 update)

Safestore (LSE: SAFE) is the UK’s largest and Europe’s second-largest provider of self-storage. It has over 120 locations in the UK. The FTSE 250 firm is forecasted to report its earnings results for the six-month period ending April 2022, on Tuesday 21 June.

However, Safestore’s first-half earnings results are yet to be officially announced on its earnings calendar. Nonetheless, these are the figures to look out for. Analysts in the UK don’t normally publish earnings previews for six-month periods, so it’s best to compare the firm’s upcoming 2022 first-half numbers to the ones from a year before. The H1 22 figures can also be useful to determine whether it’ll outperform its FY21 numbers, or even beat analysts’ FY22 forecasts.

Vertu Motors

Sellers of luxury goods face significant uncertainty as the cost of living crisis worsens. But its my belief that car retailers like Vertu Motors (LSE VTU) will profit enormously from soaring demand for electric vehicles (EVs). And this makes the UK share a top buy for me for the near term and beyond.

It’s not just environmental concerns that are driving sales of low-carbon cars. Rocketing petrol and diesel prices — and their impact on customer wallets — are also boosting consumer interest.

A study by motoring consultancy New AutoMotive shows that the cost of running an EV is now 80% cheaper than a car with an internal combustion engine. The news comes as the cost of filling the tank of an average family car has passed £100 for the first time.

Data from the Society of Motor Manufacturers and Traders (SMMT) reveals how solid demand for EVs remains despite soaring inflation. Sales of new battery EVs jumped 17.7% year-on-year in May, latest data shows.

I worry that Vertu Motors faces the prospect of empty showrooms as the car industry faces ongoing production issues. However, the business is enjoying better margins on its new and used vehicles due to tighter supply, reducing a lot of the danger to profits.

Besides, I think that Vertu’s ultra-cheap share price reflects the risks it faces today. At 57.9p per share, the retailer trades on a forward price-to-earnings (P/E) ratio of just 7.7 times.

Vertu’s dividend yield also clocks in at a handy 3.2% at current prices, providing an added bonus.

The Berkeley Group

I already own a couple of FTSE 100 housebuilders in my portfolio. And I’m considering adding The Berkeley Group (LSE: BKG) to the set as the housing market keeps steaming ahead.

Rising interest rates pose a dangers to buyer affordability — and thus newbuild demand — looking ahead. So does the deteriorating UK economy which threatens to damage market confidence.

At the moment though, house prices continue to rise at breakneck speed. And it encourages me to believe that Berkeley and its peers should continue to enjoy handsome earnings growth. Latest data from Halifax shows the average property price in the UK rose 10.5% in May.

I like Berkeley in particular because of its focus on the more economically-stable regions of London and the South East. Official data this week showed that the capital’s economy (along with Northern Ireland) is now back above pre-pandemic levels while other regions struggle.

Finally, Berkeley offers excellent value for money right now. The housebuilder trades on a forward P/E ratio of 10.7 times. It also offers a 5.6% dividend yield at current prices of £42.30 per share. I think this is a top FTSE 100 share for me to buy today.

There’s a danger that the housing market could slow sharply as interest rates rise. But it’s my belief that the low valuations of the FTSE 100 housebuilders reflect this possibility. Berkeley, for instance, trades on a forward price-to-earnings (P/E) just above the bargain benchmark of 10 times.

I like Berkeley in particular because of its focus on London and the Southeast. The UK capital has been an economic, social and cultural hotspot for centuries and will continue to be so. So I’m tipping house price growth in and around the region to remain rock-solid.

6.2% yields

To illustrate the point, a report by insurer Direct Line shows that the average first-time buyer in London now needs to pay £223,751 to get on the property ladder. That’s almost 25% more than they had to fork out just six years ago.

I expect these strong price increases to continue, even if growth slows due to Bank of England rate hikes. It’s my belief that homes demand will keep on outstripping supply by some distance. And in this landscape Berkeley is likely to remain a big payer of dividends.

For this financial year (to March 2023), Berkeley carries a large 6% dividend yield. And for next year the reading moves to 6.2%.

A safer stock for tougher times

SSE (LSE: SSE) is another cheap Footsie stock on my radar for these uncertain times. I think its ultra-low price-to-earnings growth (PEG) ratio of 0.7 represents excellent value.

Buying stocks that generate all or most of their profits from the UK is dangerous as recessionary risks increase. But electricity producers like SSE don’t face the considerable pressures of cyclical shares due to the essential nature of their operations.

This gives SSE the financial strength and the confidence to pay big dividends, regardless of the economic landscape.

I also like SSE because of its vow to link dividend growth to the rate of retail price inflation (RPI) this fiscal year. Prices are rising at their fastest for decades and investors need to protect themselves from this threat.

Renewable energy giant

SSE isn’t just a great buy for today though. Because of its focus on renewable energy, it’s likely to flourish as the world transitions from fossil fuels to green sources.

The International Energy Agency says that some 295GW of new renewable energy capacity was added in 2021. It predicts that the annual figure will rise to 320GW in 2022.

SSE’s dividend yield sits at a chunky 4.8% for this financial year (to March 2023). And it sits at a healthy 3.4% for fiscal 2024 too, despite plans to rebase the dividend.

Like Berkeley Group, this is a FTSE 100 dividend stock I’d buy today and look to hold for the next decade.