Last week’s budget received a favourable response from the stock market. When I checked, 62 FTSE 100 shares were showing gains by mid-afternoon.
Today, I want to look at two FTSE stocks I think offer a good package of dividend income and growth potential. They’re both shares I’d consider buying for my own portfolio.
When cash is king…
When times are tough, there’s no substitute for cash in the bank. FTSE 100 housebuilder Persimmon (LSE: PSN) had net cash of £895m at the end of 2020, excluding money owed for land purchases.
I think having plenty of surplus cash should give Persimmon’s management the freedom to make the right decisions for long-term growth. When I pair this with the government’s latest measures to support house prices, I’m not surprised Persimmon’s share price closed up 6% on Budget Day last week.
Stable house prices at current levels make Persimmon a very profitable business. The group’s 2020 results show the company generated an underlying gross profit margin of 31% on new housing last year. That’s only a slight reduction from 33% in 2019, despite the disruption caused by the pandemic.
Although Persimmon’s pre-tax profit fell by 25% to £783m last year, the company ended the year with forward sales of £2.3bn, a 15% increase on 2019. Management expects new home completions to return to 2019 levels in 2022.
This FTSE 100 share has become known for its generous dividend in recent years. Last year saw the payout cut to 110p, but Persimmon’s management has committed to return to a 235p annual payout in 2021. That gives a dividend yield of more than 8%.
When I buy housebuilder shares, I’m always aware of the risk that the housing market could crash. Lower selling prices could quickly crush Persimmon’s profits. In my view, house prices have been relatively high for a long time now, so I’d say there’s some risk we could be heading for a downturn.
However, there’s no sign of any slowdown so far, so this is a stock I’d be happy to own at the moment for its generous income.
A FTSE 100 share with growth potential?
The second stock I’ve been looking at is FTSE 100 packaging group Mondi (LSE: MNDI). This business benefited from strong demand for e-commerce packaging last year, which helped to offset weaker demand from industrial companies.
I believe sustainable packaging will be a growth market for the foreseeable future. Aside from the obvious growth in online retail, I think there’s probably a lot of room for improvement in areas such as replacing plastic with cardboard-based products.
Like Persimmon, Mondi generates attractive profit margins and strong cash flows. Although higher raw material costs contributed to a 30% drop in profits last year, Mondi’s earnings still covered the dividend payout twice.
My main concern with this FTSE 100 share is its debt levels are relatively high, by the standards I like to use. I’m also aware that profits can be quite variable, due to the impact of changing wood and pulp costs — Mondi’s raw materials.
However, no share is free of risk. There’s always something that can go wrong. But Mondi’s stock currently trades on 15 times forecast earnings, with a 3.3% dividend yield. So, I’d be happy to buy at this level for a long-term holding.
