FTSE 100 shares: 2 stocks I’m NOT buying for 2021

I’m not optimistic on all FTSE 100 shares for 2021. These two stocks have attractive dividend yields, but I wouldn’t buy. Here’s why.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I think the prospects for some FTSE 100 shares in 2021 don’t look great. I will be staying well clear of Vodafone (LSE:VOD) and Reckitt Benckiser (LSE:RB) in 2021. Let me explain why.

Vodafone

Vodafone, as I write, has a market cap of £33bn. But the FTSE 100 company has a net debt position of €44bn (which is approximately £40bn). I can’t justify buying Vodafone shares where the level of debt exceeds the total equity value of the firm.

The management team is implementing a cost-cutting programme and improving its customer focus. These measures will take some time to come to fruition and won’t single-handedly reduce the debt mountain.

Vodafone is also looking to spin off its Vantage Towers business through an initial public offering (IPO) in early 2021. The sale proceeds will be used to pay down debt and possibly pay out a special dividend to investors.

Vantage is Vodafone’s European tower infrastructure business but I have concerns over its IPO. The sale means that the FTSE 100 company will be losing an attractive and valuable asset where revenue is inflation-linked. The requirement for data as well as the roll-out of 5G technology means that growth potential for Vantage Towers is huge.

In 2019, Vodafone completed the purchase of Liberty Global’s assets in Germany and Central Eastern Europe by taking on more debt. The reason behind the deal was to enable cross-selling opportunities in key European markets. Vodafone hopes that this convergence strategy will improve customer retention. While this may be true, it will also take time to bear fruit.

Vodafone’s dividend hasn’t always been covered by its earnings. I’m not convinced that its offering is different to its competitors. Consumers just look for the cheapest deal and other telecom providers could easily copy Vodafone’s strategy. This could impact revenue and thus the security of the dividend. For these reasons I will give the FTSE 100 shares a miss.

Reckitt Benckiser

Reckitt Benckiser shares have performed well during the coronavirus pandemic. Demand for its hygiene brands, such as Dettol, has been strong, but I don’t think this is sustainable going forward. I’m sceptical over management’s view that the trends established in the current crisis will translate into a long-term behaviour shift.

In September 2019, a new CEO arrived resulting in a change in Reckitt Benckiser’s strategy. The FTSE 100 company will be investing £2bn over three years to improve growth. I agree that a fresh action plan was required to boost Reckitt Benckiser’s sales, but it’s still too early to assess whether the strategy has worked.

My hesitation over Reckitt Benckiser shares has been reinforced by Terry Smith’s complete sale of the stock in November. The company was part of the original Fundsmith Equity portfolio, a £23bn concentrated fund of 30 global stocks.

While Smith doesn’t mention the reason behind his sale of Reckitt Benckiser, I suspect he was concerned that the strong demand for hygiene and health products had peaked and is unlikely to continue.

While Reckitt Benckiser’s dividend yield is attractive, I would like to see some evidence that the new CEO’s rejuvenation programme is working in a post Covid-19 world. I don’t expect the economy to recover fully from the pandemic in 2021. Until then, I will hold fire on these FTSE 100 shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Nadia Yaqub has no position in any of the shares mentioned. 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.

More on Investing Articles

Happy parents playing with little kids riding in box
Investing Articles

2 FTSE 250 dividend growth stocks I’m considering for passive income

Paul Summers thinks the best dividend stocks to buy are those that consistently return more money to investors every year.

Read more »

Investing Articles

The Compass Group share price looks ready for growth after positive 2024 results

The Compass Group share price is up 4% today following positive full-year results. Our writer considers its prospects in 2025…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

How I plan to build an £86k yearly second income in the stock market

Is it realistic to aim for a substantial future second income by investing in high-quality shares? This writer firmly believes…

Read more »

Investing Articles

Here’s the Vodafone share price forecast up to 2027

Can anything stop the Vodafone share price slide? It's still early days for the company's turnaround plan, so we might…

Read more »

Investing Articles

Down 37%, here’s one of my favourite FTSE 100 bargain shares to consider

This FTSE 100 retailer's shares have collapsed in 2024. Despite tough trading conditions, is now the time to consider buying…

Read more »

Investing Articles

Which do I like best today, Nvidia or Tesla stock?

EV maker Tesla stock is on the up, while Nvidia growth is softening a bit. But they're both in the…

Read more »

Investing Articles

After jumping 15%, my favourite FTSE 250 stock looks set for the premier league

Games Workshop stock recently reached an all-time high, placing it within touching distance of promotion from the FTSE 250.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

1 top growth stock on my Christmas buy list!

Ben McPoland reveals one top-notch growth stock down 29% that he plans to stuff into his portfolio in time for…

Read more »