Can these 2 FTSE 100 shares overturn year-to-date underperformance?

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Can these 2 FTSE 100 shares overturn year-to-date underperformance?

The FTSE 100 index’s year-to-date gain of 11% shows that it has enjoyed a relatively strong performance in 2021. However, some of its members have failed to share in its success. Indeed, shares in British American Tobacco (LON: BATS) and Barratt (LON: BDEV) are down 8% and 2%, respectively, since the start of the year.

Could they now offer good value for money following disappointing share price performances? Or is further share price underperformance relative to the FTSE 100 index ahead for both stocks?

British American Tobacco

BAT’s latest half-year results showed it continues to deliver a solid financial performance. On an adjusted basis, revenue increased by 8% and earnings per share rose by 6% versus the prior year. Moreover, it is making headway in pivoting to next-generation products, such as e-cigarettes. They now comprise over 7% of the firm’s total revenue and grew sales by in excess of 40% in the first half of the year.

Furthermore, BAT’s income potential appears to be relatively attractive. While the FTSE 100 index yields around 3%, the firm’s shares have a forward dividend yield of 8.5%. And, with strong and reliable cash flow expected to be generated over the coming years, dividend growth is forecast to equate to an annualised rate of 6% over the next two years. This could keep the company’s growth in shareholder payouts higher than a rapidly rising inflation rate.

Of course, significant concerns persist regarding the long-term outlook for tobacco companies. Increasingly onerous regulations, changing consumer preferences and a shift among investors towards ESG-related stocks could limit BAT’s share price prospects.

However, with a defensive business model, a strategy to capitalise on rising popularity among reduced-risk products and significant income appeal, the company’s outlook could be far more positive than its recent share price performance suggests.

Barratt Developments

Shares in housebuilder Barratt made a strong start to the year as investors looked ahead to an improving economic outlook. However, they have fallen by 9% in the past three months as rising inflation has prompted an increasingly hawkish stance from the Bank of England.

Clearly, rising interest rates will make properties less affordable due to higher mortgage costs. However, mortgage repayments as a percentage of earnings are currently just under 30%. This is the same level as they were in the early 2000s and is significantly below the 47% figure recorded shortly before the global financial crisis. As such, modest interest rate rises may fail to kill off house price growth due to long-term factors such as an undersupply of new homes, population growth and favourable government policies for first-time buyers.

Furthermore, Barratt’s financial position suggests it is well-equipped to overcome a period of relative instability. It has a £1.3bn net cash position and may even be able to capitalise on changing market conditions via the acquisition of land.

With a forward price-earnings ratio of 9 and a prospective dividend yield of 6.5%, the company’s shares appear to offer good value for money. Recent underperformance versus the FTSE 100 may persist in the near term, but on a long-term view the stock could deliver a much-improved return.

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