The FTSE 100’s rise since the start of the year has not caused all of its constituents to trade on high valuations. Indeed, there are still a number of large-cap shares that offer low ratings, as well as impressive dividends that could rise over the long run.
As such, now could be a good time to buy such stocks while they offer high total return prospects. In fact, selling higher-rated shares and recycling the capital into cheaper stocks could be a sound strategy.
With that in mind, here is a 7%+ yielding FTSE 100 share that could be worth buying today, as well as a FTSE 250 stock that appears to have an unfavourable valuation.
British American Tobacco (LON:BATS) Tobacco stocks have been highly unpopular over the last few years, with changing regulations causing companies such as British American Tobacco (LSE: BATS) to record share price declines. This means that the stock now has a dividend yield of over 7%, while it is expected to raise dividends at a rapid rate over the medium term.
In fact, the company’s dividend appears to be highly affordable. It is covered 1.5 times by profit, while earnings growth of 9% is forecast for the current year. This indicates that there could be scope for a continued rise in dividends as the business raises prices on cigarettes and invests in the development of reduced-risk products.
Although the tobacco industry does not offer the defensive appeal that it did a few years ago, with cigarette volumes likely to remain under pressure, the increasing popularity of e-cigarettes presents a growth opportunity. With British American Tobacco having a strong position in the next-generation products industry, and the stock trading on a price-to-earnings (P/E) ratio of 9, it seems to offer scope for capital growth and income investing potential.
Softcat While British American Tobacco appears to offer excellent value for money, FTSE 250-listed provider of IT infrastructure products and services, Softcat (LSE: SCT), seems to be overpriced. The company’s shares have risen by 59% since the start of the year, and now trade on a P/E ratio of 32.
The company’s trading update released on Monday showed that it is performing well, with it delivering strong year-on-year growth across all income and profit measures. Its growth is broad-based, with different technology areas and customer segments delivering increases. As such, it is set to beat expectations for the full year.
However, a strong performance from Softcat from a business perspective may not be replicated in a rising share price. Its valuation appears to have become overly generous, with a forecast rise in net profit for the current year of 5% suggesting that its share price could come under pressure over the near term. As such, now may be a good time to pivot towards undervalued shares within the FTSE 350.
Peter Stephens owns shares of British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. 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