Investing in the stock market is a great way to increase your wealth over long periods. Even if you’ve no interest in learning about stocks, or lack the time, a low-cost FTSE 100 tracker fund is a good option to consider, if you have £3,000 to lock away for the long term.
However, if you’re reading this article you probably prefer to invest in individual stocks, or are considering doing so. If I had £3,000 on hand today, I’d split it three ways and buy shares in FTSE 100 giants Associated British Foods (LSE: LON:ABF), Smiths Group (LON:SMIN) (LSE: SMIN) and BAE Systems (LON:BAES) (LSE: BA).
I think these companies are trading at very attractive valuations. And, as a bonus, if you’re in the early stages of building a stock portfolio, they offer considerably more business and geographical diversification than you might think.
Great entry point Associated British Foods’ name doesn’t do justice to either its international reach or to the range of businesses under its ownership. Around 60% of the group’s revenue comes from outside Britain and around 60% from non-food businesses.
Retailer Primark is ABF’s biggest business, and its expansion into the US — still in its early days — represents a huge long-term growth opportunity. Meanwhile, its grocery, ingredients and agriculture divisions are solid performers, if lacking Primark’s dynamic growth. Its fifth division, sugar, has faced external headwinds in recent years, but improvement is expected in 2020.
ABF trades on a current-year forecast price-to-earnings (P/E) ratio of 16.8, with a rock-solid dividend yield of 2.1% and a long record of dividend growth. The P/E is low by historical standards, and I believe this is a great entry point for a long-term investment in the business.
Maximising value for investors Industrial technology group Smiths also owns a range of businesses, serving diverse industries in diverse geographies. The company is evolving under new management. We’ve also seen disposals of non-core businesses and investment in high-growth areas where the group has scale and technology leadership.
The biggest news on this front was an announcement last November that management is preparing to separate the medical division from the rest of the group, which I think should prove value-creative for shareholders.
Smiths trades on a current-year forecast P/E of 14.8 and dividend yield of 3.2%. I view this as an attractive valuation, due to management’s focus on maximising value for shareholders. This should include a continuation of the group’s excellent long-term dividend record.
Shares a steal My third pick, BAE Systems, also boasts a fine dividend history. In addition, it currently sports the lowest earnings multiple and highest yield of the three stocks. The forecast P/E is 10.5 and the prospective yield is 4.9%.
The company is focused on the defence sector, and its work ranges from massive military kit (for land, air and sea) to cyber and intelligence. The UK and US governments are major customers, but other markets include Saudi Arabia (18% of group revenue).
The latter territory’s behind the current weakness in BAE’s share price. The company has said a German ban on arms exports to Saudi Arabia, after the killing of journalist Jamal Khashoggi, could potentially scupper a multibillion-pound Typhoon fighter jets deal. I think there’ll ultimately be a pragmatic outcome and that BAE’s shares are a steal.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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