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

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »