Robert Stephens, CFA, discusses the investment potential of three FTSE 100 shares amidst an uncertain economic backdrop.
It’s unsurprising that defensive FTSE 100 income stocks have become more popular among investors over the past few months. A weak economic outlook that could deteriorate further, as well as dividend cuts across many sectors during a period of low interest rates, have focused investor attention on a smaller number of businesses.
Among them are AstraZeneca (LON:AZN), Polymetal (LON:POLY) and United Utilities (LON:UU.). Even though all three stocks face their own risks, they could become increasingly attractive for a wider range of investors, in my opinion.
Long gone are the days when AstraZeneca would post falling sales figures due to a loss of patents. Its investment in new drugs and in its presence across emerging markets is paying off, with double-digit sales and earnings growth reported over recent quarters.
The company’s long-term growth potential continues to be high. Trends such as world population growth and urbanisation are likely to persist in future, and are set to cause incidences of non-communicable diseases such as cancer to rise. This could provide a catalyst for the company’s financial performance.
AstraZeneca’s improving profitability means that its dividend is likely to grow, rather than be cut as per many listed businesses of late. Its yield of 2.5% may not be spectacular, but the firm’s low correlation with the macroeconomic outlook and growth potential mean that it could become increasingly popular among a wide pool of investors.
Gold miners have bucked the wider stock market trend in the first half of 2020, as the price of the precious metal has soared to a nine-year high. Further gains could be ahead for Polymetal, as the prospect of persistently low interest rates and an uncertain economic outlook cause investors to turn towards perceived lower-risk assets such as gold.
The company is expected to yield over 5% in the current year, which could broaden its appeal to income investors while dividend cuts are taking place elsewhere. Its price-earnings ratio of 16 could prove to be attractive in a period where rising profitability has become a scarce event across many industries.
As with any pure-play commodity business, Polymetal may experience a volatile financial future. However, its valuation, defensive profile in an uncertain period and income potential could help to extend its share price rise of 33% since the start of the year.
Despite an increasingly onerous regulatory environment, utility companies such as water services business United Utilities could become more popular among investors. The company’s defensive credentials and its sound income prospects may mean that it stands out during a period where investor confidence is in relatively short supply.
The stock currently yields 5%, and is targeting a growth rate in shareholder payments that equals inflation over the next five years. This could further enhance its income appeal at a time when many companies have cut their dividends, while others may struggle to deliver a rising payout due to weaker trading conditions.
Although not immune from the impact of Covid-19 due to the potential for economic hardship among its customer base, United Utilities could offer stability relative to other FTSE 100 shares as the current economic woes play out.