After a buoyant performance so far in 2021, could autumn be when the FTSE 100 starts to go into reverse? The index has increased in value by a fifth over the past year. But since June it has essentially moved sideways. That might just reflect traders taking holidays. But it could also suggest the market is more fully valued than it was earlier this year. I’ve made a list of what I see as some of the best UK shares to buy for my portfolio due to their resilience and income generating prospects. Here are four shares from it.
Retail leader: Tesco
No matter what happens in the stock market, tens of millions of people need to buy groceries. That is why general retailers are often seen as strong defensive stocks in the face of a market downturn. As the leading supermarket group in the UK, Tesco fits the bill. The company benefits from a well-established brand, broad store estate, and economies of scale when buying. All can help it deliver profits, which last year came in at £721m (for its continuing businesses) despite the costs associated with the pandemic. The shares currently offer a 3.9% dividend yield.
But there are risks with Tesco. An increase in online shopping could hurt profitability, and stretched supply chains could mean unforeseen costs in coming months.
Industrial moat: Victrex
Highly successful investor Warren Buffett often talks about investing in businesses that have a ‘moat’. He basically means a sustainable competitive advantage. Chemicals group Victrex produces high performance polymers and has proprietary technology which helps set it apart from its competitors. Critical use functions such as in aeroplanes mean that customers are willing to pay for quality. That gives Victrex pricing power.
Whatever happens in the stock market, demand should be fairly resilient. Deferred elective medical procedures hurt sales last year. But revenues in the latest quarter showed 37% growth compared to the prior year period. One risk is added logistics complexities and costs of international cargo, as exports account for almost all of the company’s sales.
Cash flow monster: British American Tobacco
Among the best UK shares to buy for my portfolio in the face of market uncertainty, I like British American Tobacco because its mammoth cash flows enable a juicy yield.
With a 7.7% yield, dividends are costly and the company also needs to service the £40bn of net debt on its balance sheet. But the company still managed to generate adjusted free cash flow of £2.5bn last year, even after paying dividends. The debt servicing cost and declining smoking rates in some markets could damage future profitability, though, which could lead to dividend cuts.
Best shares to buy: Legal & General
During last year’s market crash, insurer and financial services group Legal & General followed the market down. But it didn’t cancel its dividend and went on to report £1.2bn in earnings for the year. That was a fall, but still substantial.
If I had bought shares during last year’s crash, I’d now have a double-digit dividend yield from my purchase. With or without a market crash, I think Legal & General offers a good dividend from a well-run business. But one risk is possible profit declines as cash-strapped customers shop around for lower premiums after long periods of low car use.
