An 8% FTSE 100 dividend stock I’d buy today, and a falling knife I’d avoid

This 8% FTSE 100 (INDEXFTSE:UKX) dividend stock looks reasonably priced, says Roland Head.

| 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.

It’s not always easy to tell the difference between bargain buys and shares that deserve to be cheap. The two stocks I’m going to look at today provide us with an example of both.

An 8% yield to take home?

Housebuilding stocks divide opinion. Some investors fear that we’re on the cusp of a housing market slump, especially in the event of a no-deal Brexit.

Despite these risks, it’s worth noting that low interest rates and high levels of employment are generally seen as supportive for the housing market. Strong demand from the rental sector is also a positive.

FTSE 100 firm Barratt Developments (LSE: BDEV) is one of my top picks in this sector. The company recently said that housing completions rose by 4.1% to 7,622 homes during the six months to 31 December. Pre-tax profit for the period rose 19.1% to £408m, thanks to higher profit margins.

The company ended the period with net cash of £388m and expects this total to reach more than £600m by the end of June. Much of this will be returned to shareholders through the firm’s dividend, with additional £175m returns planned for 2019 and 2020.

At current levels, the shares trade on 8.3 times forecast earnings with a dividend yield of 7.8% for the current year. This high yield includes the £175m return I mentioned above — without this, the yield would be about 5%.

If the housing market remains stable, Barratt’s valuation looks like a buy to me. It’s not without risk, but I believe this business is fundamentally sound and should reward long-term investors.

This could be the end

One company I feel much less confident about is FTSE 250 pharmaceutical firm Indivior (LSE: INDV). Shares in this addiction treatment specialist have fallen by nearly 80% since June 2018.

The reason for this collapse is that a rival firm is now very close to gaining approval to sell a generic alternative to Indivior’s main product, Suboxone Film. This is used to treat opioid addiction, mainly in the US market.

Indivior’s lawyers have been fighting a running battle to prevent this for several years. But the commentary in today’s results suggests chief executive Shaun Thaxter is preparing for a final defeat which could come later this month.

Thaxter says the company has been cutting headcount, hoarding cash, and has prepared its own generic version of Suboxone Film. This will be launched if generic rivals are given the green light.

Sales could fall by 80%

In 2018, Indivior generated net revenue of $1,005m. Almost all of this came from Suboxone. The firm’s only other commercial product, Sublocade, generated revenue of just $12m.

Generic products sell at much lower prices than patent-protected branded medicines. Indivior expects its generic product to generate revenue of only “tens of US $ millions.” Sales of the more expensive branded product would almost disappear.

Sales of new product Sublocade are expected to rise to $50m-$70m in 2019. Based on this guidance, I estimate that Indivior’s core revenue could fall by 80% to as little as $200m in 2019.

This is probably a worst-case scenario, but it seems to me that the group’s £791m market-cap is almost certainly too high. In my view, buying the shares at current levels is little more than a gamble. I see this as a stock to avoid.

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.

Roland Head 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 senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

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

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »