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2 cheap shares I think have hidden growth prospects

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Image source: Getty Images

With February drawing to a close this week, I have been thinking about what shares I might consider adding to my portfolio next month if I have spare cash to invest. Here are two cheap shares I would be happy to buy because I think they offer me future growth opportunities that might not be immediately obvious.

Legal & General

The financial services powerhouse Legal & General (LSE: LGEN) generated £2.3bn in post-tax profits last year. Given that the current market capitalisation of the company is under £15bn, it looks like a cheap share to me.

Why do I like the company as a potential addition to my portfolio?

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First, the market it serves is massive and is likely to experience long-term resilient demand.

There are millions of pensioners now and that will likely remain true forever. Many of them need the sort of financial provisions supplied by Legal & General. With large sums at stake, that can be a lucrative business, as Legal & General’s profitability shows.

Secondly I think the company’s iconic brand, large customer base, and long experience all help set it apart from competitors.

That matters because the lucrative pensions market attracts a lot of companies. That poses a risk to profitability, as it can lead to pressure on profit margins. So Legal & General’s strengths can hopefully help it combat that risk.

Thirdly, the 8.1% dividend yield on offer from this FTSE 100 firm is appealing to me.

The growth prospects here seem uneven. Last year saw revenues rise by 32% — but that still left them below their 2019 level.

But I think Legal & General is positioned for growth because it has a strong proposition in a market I expect to benefit from long-term growth drivers, due to an ageing population.

British American Tobacco

With a price-to-earnings ratio of six, British American Tobacco (LSE: BATS) certainly looks like a cheap share to me.

But what about the growth prospects?

After all, the lion’s share of the firm’s business is in cigarettes. In most markets the company serves, demand for cigarettes is in long-term structural decline.

Indeed, last year the company wrote down the long-term value of some its brands, suggesting that at some future point it expects them to be worthless.

That shifting demand picture for cigarettes is definitely a risk for the company. But the same concerns have been around for decades already and British American has continued to grow in size.

Partly that has been through acquisition, an approach it could continue to use. Partly it has been through raising the price of cigarettes thanks to its pricing power. I think that approach can also continue.

Another long-term growth driver has been the company’s ability to build powerful brands and distribution networks. As it increasingly shifts its focus to non-cigarette products, I think that proven commercial prowess could help the business keep on growing.

The firm has raised its dividend annually for decades and currently yields 9.8%.

The post 2 cheap shares I think have hidden growth prospects appeared first on The Motley Fool UK.

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C Ruane has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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 2024