With the FTSE 100 currently trading at a relatively attractive price level, there are a number of stocks that could deliver improving returns in 2020 and beyond.
Certainly, there are numerous risks facing the world economy that could negatively impact on the index and its members in the short run.
But, with low valuations and sound growth strategies, these two large-cap shares may offer favourable risk/reward ratios that make them attractive purchases for the long run.
British American Tobacco
Tobacco companies such as British American Tobacco (LSE: BATS) have become increasingly unpopular over the past few years. Concerns surrounding demand for cigarettes and the potential for regulatory change across new products such as e-cigarettes have prompted investors to become increasingly cautious about their growth potential.
However, recent updates from British American Tobacco have shown that the company appears to be delivering on its strategy. It is ramping-up sales of its reduced-risk products, while continuing to benefit from the pricing power of its key tobacco brands. Alongside the potential for new technology to maintain high demand within the wider industry, the cash flow generated by the business in the long run may fund further dividend growth.
At the present time, the stock has a dividend yield of 7.2% from a payout that is covered 1.5 times by net profit. Since the company’s bottom line is forecast to rise by 8% this year and 6% next year, its outlook suggests that dividends could increase at an inflation-beating pace over the medium term. As such, the company could offer income and value appeal that leads to a rising stock price as reduced-risk products such as e-cigarettes increase in popularity over the coming years.
Another FTSE 100 company that has become increasingly unpopular in the past few years is ITV (LSE: ITV). The media company’s reliance on the performance of the wider economy has become evident, with weak consumer and business confidence contributing to stalling demand for TV advertising.
The company’s recent updates have shown that while weak demand is negatively impacting on its financial performance, its long-term growth strategy may provide it with a stimulus. A move into streaming services via the recently launched BritBox service, as well as increasing investment in its production capabilities and online offering, could reshape the business so that it is more competitive in an evolving media sector.
ITV’s shares currently trade on a price-to-earnings (P/E) ratio of just 11. This shows that while the company could experience further uncertainty in the short run, investors may have priced in the challenging operating conditions that it faces.
As such, now could be the right time to buy a slice of the business. Its strategy could deliver improving financial performance, with its valuation suggesting that its risk/reward ratio is attractive relative to many of its FTSE 100 index peers.
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Peter Stephens owns shares of British American Tobacco. The Motley Fool UK has recommended ITV. 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.
Motley Fool UK 2019