2 contrasting FTSE 100 shares with long-term growth potential

The FTSE 100 index (INDEXFTSE: UKX) has fallen by 6% since the start of the year. However, there is a large variance in performance among its constituents.

For example, financial services firm Legal & General’s (LON: LGEN) share price has declined by 22% year-to-date. By contrast, defence company BAE (LON: BA) has recorded a 45% share price rise since the turn of the year.

Both companies, though, appear to offer long-term investment appeal. They could outperform the FTSE 100 index in the coming years.

BAE

BAE’s shares have been positively impacted by a rapidly evolving geopolitical outlook over recent months. Russia’s invasion of Ukraine appears to have caused a major shift in attitude towards defence spending across Europe and elsewhere that could mean it rises at a brisk pace over the coming years. The company’s share price has also been aided by a stronger dollar, since 43% of its revenue is generated in the US.

Encouragingly, the firm is making strong progress in delivering on its goals. Its latest trading update stated that it is on track to meet full-year guidance, with a solid financial position allowing for the prospect of further acquisitions to improve its market position.

Although BAE’s share price rise means that it now trades on a price-to-earnings ratio of around 15, it continues to offer long-term investment appeal. The firm has a wide range of operations across land, sea, air and cyber that are likely to experience a stronger outlook than they have done over recent years. And while its 3.1% dividend yield is less than the index’s 3.6% yield, its potential to grow dividends at a relatively fast pace could appeal during a period of high inflation.

At a time when few industries face such buoyant outlooks, the company’s stock price appears worthy of its current premium compared to other FTSE 100 firms.

Legal & General

As mentioned, Legal & General’s share price has experienced a disappointing first half of the year. Its fall is at least partly due to the increasingly uncertain economic outlook that has prompted declines across a range of asset prices. Since the firm’s investment management division relies on fees charged on portfolios, their shrinking size over recent months means that its financial prospects may be less upbeat than they were earlier in the year.

Still, the company’s long-term growth opportunities remain intact. For example, its pension risk transfer business could enjoy significant growth as a growing proportion of direct benefit pension plans are de-risked. Additional growth opportunities include those related to long-term themes such as climate change and an ageing population. They could provide relatively stable and predictable returns over the coming years.

Following its share price fall, Legal & General now has a dividend yield of 7.9%. This highlights its income appeal in an era of continued low interest rates. And with the firm’s shares now trading on a price-to-earnings ratio of around 7, it appears to offer a wide margin of safety. As a result, its total return potential seems high.