Looking to retire? Consider these top FTSE 100 dividend stocks

Years ago, I had no idea what kind of investing strategy would be the most successful in getting folk to a comfortable retirement

But as I’m getting ever greyer, the answer is becoming strikingly clear. The most successful among my peers are those who long ago understood the long-term compounding power of reinvesting dividends. And they’ve mostly been investing in top FTSE 100 companies.

Suppose you invest in a stock that’s paying 5% in dividends. That’s a good yield, and we’re currently in times when I reckon you have a very good chance of achieving that level of annual income. After 20 years you’d have doubled your original investment if you’d just taken the cash.

Suppose instead, you reinvested the cash in more shares. And suppose those shares were appreciating in value by 5% per year (which is close to the FTSE 100’s long-term average). It would take only a little over 14 years to double your investment, and that’s quite a difference.

How long would it take to treble your money? Taking the cash out each year, it would take 40 years in all.

But would you believe that the extra power of reinvesting the cash would get you to the same total a whopping 17 years earlier, after just 23 years? And a 40-year investment based on reinvesting dividends would see you with seven times your original stake!

Can the FTSE 100 really do this for you? 

Over the long term, the UK’s top index has typically provided average dividend yields of a bit under 3.5%. Added on to rising share prices, that’s pretty good, but right now we’re in a period of unusually high yields. According to the quarterly Dividend Dashboard from AJ Bell, over the next year the Footise is set to pay out a total of £87.5bn in dividends, which would provide a yield of 4.4%. If you buy when yields are high, you can lock in superior returns for the decades ahead.

What should you choose? Just the biggest current yields? I’d say no to that, for a couple of reasons. Firstly, we’ve seen plenty of previous high dividends which have become overstretched and ended up being slashed — think of the financial crisis, for example. And you need to be careful not to end up too heavily invested in one sector — the housebuilding business currently dominates the FTSE 100’s top dividends, and while I like the sector, I think diversification is a good idea.

Looking at FTSE 100 stocks offering decent yields, but with good cover by earnings (which suggests they’re reliable), and with a long-term record of progressive dividend rises, I’ve come up with a handful that I reckon could form the basis of a top retirement portfolio.

I’d go for something like BP or Royal Dutch Shell, with forecast yields of around 5% (which would have been higher had you bought them before the recent share price rises), SSE on close to 7% (with good visibility and adequate cover), BT Group, whose dividends have been growing and yielded 4.6% this year, Rio Tinto or BHP Billiton, which are cyclical but yield around 5%, and perhaps Legal & General on a yield of 5.7%

I’d add a housebuilder, probably Taylor Wimpey with a yield of 7.5% (though perhaps a bit toppy as earnings growth is slowing), and I might even add a couple of investment trusts. Want more? Read on…

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Our top analysts have highlighted five shares in the FTSE 100 in our special free report “5 Shares To Retire On”. To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever!

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Alan Oscroft 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.

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Marks & Spencer: How safe is the dividend?

With a dividend yield of around 6.2%, Marks & Spencer (LSE: MKS) is among the highest yielding stocks in the FTSE 100. But before jumping on board with that eye-catching yield, there are a few things investors need to know about the company.

Challenging market conditions

The high street is going though a difficult period amid a squeeze on incomes and the shift to online shopping, and M&S is no exception to the trend. Adjusted pre-tax profits fell for the second consecutive year to £580.9m, the company reported on Wednesday, as a fall in sales and higher costs squeezed earnings.

The company has been restructuring itself for some time now, but its efforts have been criticised as inadequate, particularly with respect to store closures and growing its online presence. It now says that over 100 stores will close within the next five years, up from its earlier target of 60 stores, but analysts warn that this may still not be enough to adapt to the rise of online shopping.

And amid challenging market conditions in the retail sector, there’s every reason to expect that more difficult times lie ahead for the company. Restructuring is a costly task, and already the costs are mounting. Exceptional costs climbed to £514.1m in the latest year, up from £437.4m in 2016/7, which meant pre-tax profits fell by 62%, to just £66.9m, once adjusted items were included.

Free cash flow

All-in-all the picture painted above doesn’t exactly give investors much confidence about the long-term sustainability of its dividends. However, a dividend cut isn’t imminent either, as the cash coming into the business still comfortably covers shareholder payouts.

Even after taking account of adjusting items, M&S generated £417.5m in free cash flow for the 12 months to 31 March. This enabled the company to cover cash dividends paid over the past year by a little less than 1.38 times, and meant it had £114.1m left over after shareholder payouts.

Still, the longer-term uncertainty remains. Without a successful turnaround in its financial performance, it cannot sustain the current level of dividend payouts indefinitely.

Digital capability

Meanwhile, rival retailer Next (LSE: NXT) seems to be in better shape. Its online business is growing at an impressive pace — up 18.1% in the first quarter, and it recently raised expectations for its full-year underlying pre-tax profits from £705m to £717m.

Among the high street clothing chains, Next has one of the biggest online operations, with just under half of all its sales coming from online customers. This puts the company in a competitive advantage against its high street rivals, as its superior digital capability means it is better placed to capture more of the fast-growing online market.

Profits still falling

Despite strong online growth, profits will likely still come under pressure from falling in-store sales and shrinking margins. With retail profitability increasingly under the microscope, Next will need to show it has a tight control on costs.

Even after an increase in its forecast for the full year, pre-tax profits are expected to decline for at least another year. This combined with a rise in capital spending means the company will probably not be paying a special dividend this year. And as such, investors can only look forward to an ordinary dividend of 158p, giving its shares a yield of 2.7%.

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Jack Tang 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.

Ocado is set to storm into the FTSE 100. Time to buy?

Ocado (LSE: OCDO) is poised for promotion to the FTSE 100 after its shares have soared around 60% over the last three months. The FTSE index committee will announce its latest quarterly review on Wednesday, based on the market capitalisation of companies at Tuesday’s closing prices. So, barring a major collapse in its share price between now and then, Ocado will join the blue-chip elite.

Elsewhere, ace fund manager Neil Woodford is set to receive another blow to his recently tarnished reputation, as his Woodford Patient Capital Trust (LSE: WPCT) is set to be kicked out of the mid-tier FTSE 250 into the FTSE SmallCap index.

Transformational deal

Ocado’s spectacular rise has come on the back of a fifth — and transformational — licensing deal, announced earlier this month. I believe this deal, with the US’s biggest traditional grocer Kroger, seals Ocado’s transition from a small, upstart UK grocery player to a global technology supplier for online grocery retailing.

The company had been promising this for years and its shares were always overvalued based solely on its UK business. The question for investors now is whether the recent rise in the shares has fully valued Ocado’s transformation into a global business or whether the market is underestimating the company’s prospects.

Build it and they will come

Ocado has a market cap of approaching £6bn, as I’m writing, which compares with, for example, Marks & Spencer at £5bn. Their respective revenues last year were £1.5bn and £10.7bn. However, a number of analysts model future revenues and cash flows that suggest there’s significant upside for Ocado’s shares. And this is without further international deals for its Smart Platform system, which now appears to have achieved go-to status.

The large number of projects Ocado has on its plate presents a degree of execution risk, but management’s record of operational excellence gives me confidence it can deliver. With the company now having demonstrated not only that it can ‘build it’, but also that ‘they will come’, I’m inclined to rate the stock a ‘buy’.

Poor risk/reward

In contrast, I moved Neil Woodford’s underperforming Patient Capital Trust onto my ‘sell’ list at the start of this year. This was on the basis that the trust has morphed into a far higher-risk proposition than when it was launched. I suggested that a discount of less than 10% to net asset value (NAV) was far too narrow for the increased risk.

Patient Capital is invested in ‘disruptive’ businesses (but not Ocado) and has seen a number of significant failures. The shares have fallen around 10% since January — precipitating the trust’s imminent demotion from the FTSE 250 — but the NAV has also fallen. As such, the discount is still less than 10% and the stock remains on my ‘sell’ list.

Changes to the FTSE indexes, including the likely ejection of security firm G4S from the FTSE 100 to make way for Ocado, will take effect from the start of trading on Monday 18 July.

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G A Chester 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.

2 top investment trusts for beginners

If you are new to investing, one of the main objectives should be to get diversified exposure to a wide range of businesses. The purpose of spreading money among different investments is to reduce the potential risk to your portfolio. As such, diversification has the potential to improve risk-adjusted returns.

But unless you’re starting with a large amount of start-up capital, the transaction costs of investing in a large diversified portfolio can be expensive. Instead, it may be better to use investment trusts to get exposure to the market.

These can be a great way for investors to buy and hold over the long term. They enable people to pool their money together to get exposure to many different companies via a single investment vehicle.

Income and growth

With this in mind, the Temple Bar Investment Trust (LSE: TMPL) is one fund to consider for anyone seeking both income and growth. The trust invests primarily in UK equities, across different sectors, seeking undervalued stocks.

The fund managers use a contrarian approach in seeking “unloved, misunderstood or forgotten stocks”. It intends to hold stocks for long periods, typically around four or five years, and aims to have a slow-but-steady turnover of its portfolio holdings.

Its top five holdings are well-recognised large-cap names, including Shell (6.3%), HSBC (6.2%), GlaxoSmithKline (5.9%), BP (5.3%) and Barclays (4.6%).

Dividend increases

The business is particularly suited to its investment trust structure as it enables the fund keep some of its dividend income in reserve, allowing it to top up income in lean years and smooth out dividend payments across the cycle. This, combined with the conservative management of its portfolio, has enabled the fund to raise annual dividends for 34 consecutive years.

This is an impressive feat, especially given that it is one of the higher yielding investment trusts on the market. With shares in the Temple Bar Investment Trust currently trading at a 5% discount to its net asset value (NAV), the fund currently offers a dividend yield of 3.2%.

It has low costs, with an ongoing charge of 0.49%, which includes a management fee of 0.35%.

Low cost

The Independent Investment Trust (LSE: IIT) is another low-cost option to consider. With ongoing charges of just 0.25% last year, the fund is one of the cheapest on the market.

The Independent Investment Trust seeks to provide good absolute returns over long periods by investing in UK and international equities. Its portfolio consists predominantly of UK companies, but there is a broad spread across large-cap, mid-cap and small-cap names.

The fund consistently keeps portfolio turnover very low, which reduces transaction costs, and is known to hold many of its investments for long periods. Its long-standing position in premium mixer drinks company Fevertree Drinks, which is currently its top position, has been a significant contributor to its recent outperformance. Elsewhere, it is overweight in the retail sector, following recent new purchases in Footasylum and Quiz.

On the downside, shares in the investment trust are expensive. They trade at a 14% premium to its NAV, as the fund is in high demand following strong recent gains. Over the past five years, it has delivered a total return of 157%, against the FTSE All-Share gain of 46%.

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Jack Tang has a position in Barclays. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Barclays and HSBC Holdings. 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.

1 FTSE 100 growth and dividend stock I’d buy with £5,000 today

I’ve long believed in Intertek Group (LSE: ITRK) as a brilliant growth bet investors can hang their hat on. And my confidence in the business – which is involved in the inspection and testing of products across a wide range of industries – was reinforced by recently-released trading numbers.

Last week the FTSE 100 firm advised that group revenues rose 4.4% at constant exchange rates in the four months to the close of April, to £861.2m. Intertek said that this improvement was “driven by a good organic growth of 4% at constant rates and by the contribution of the acquisitions we made recently in attractive growth and margin sectors.”

The headline number was less impressive and thanks to adverse currency movements, the business actually saw revenues slip 2.5% from a year earlier. It’s not a surprise to see market makers ignore this reversal however, and send Intertek’s share price to within a whisker of last autumn’s record above £54 per share.

Products still improving

The market cheered news that the breakneck momentum at Intertek’s core Products arm has continued, and organic sales here rose 6.6% during the first four months of 2018, speeding up from the 5.5% advance printed in 2017.

And Intertek believes there is much more to come, the firm commenting that the division “will benefit from mid-to-long term structural growth drivers including product variety, brand and supply chain expansion, product innovation and regulation, the growing demand for quality and sustainability from developed and emerging economies, the acceleration of e-commerce as a sales channel, and the increased corporate focus on risk.”

Elsewhere, the business saw organic sales at its Trade and Resources units rise 0.6% and 0.3% respectively in the period.

A quality selection

The global quality assurance market is worth many, many billions of pounds, and thanks to its broad geographic and sector diversification – it has in excess of 1,000 sites in more than 100 countries – Intertek is well placed to latch onto this opportunity.

What’s more, Intertek remains busy on the acquisition trail to boost its operational and territorial bulk. Last month it snapped up Colombia-based Proasem which is “a leader in laboratory testing, inspection, metrology and training services” for an undisclosed fee. And Intertek’s impressive cash generation should keep the M&A action coming thick and fast (free cash flow of £341.6m in 2017 was up 7.4% year-on-year).

Dividends to keep bouncing

Intertek has proved to be a brilliant pick for dividend chasers in recent times, the company hiking the dividend 35% over the past three years alone. And thanks to its strong balance sheet and bright earnings outlook — the City is expecting bottom-line advances of 1% and 8% in 2018 and 2019 alone — share pickers can look forward to further dividend rises.

Last year’s 71.3p per share payment is predicted to bound to 89.7p this year and again to 98.2p next year, estimates that create yields of 1.7% and 1.8%.

Intertek’s forward P/E ratio of 27.3 times might be expensive on paper, but in my opinion this is a small price to pay given the company’s significant structural opportunities and its exciting growth strategy, factors that should keep dividends growing at quite a pace.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Intertek. 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.

Can you really make 10% a year from the FTSE 100?

A stock price graph showing growth over time

Financial experts often advise that you can expect to generate returns of around 8-10% per year from the stock market over the long term. But is that kind of return achievable by investing in a simple FTSE 100 index tracker which tracks the performance of the UK’s largest 100 companies? Let’s take a closer look.

10-year return

It’s fair to say that an investment time horizon of 10 years or more can be classified as ‘long-term’ investing. So let’s analyse the total returns from the FTSE 100 over the decade-long period to the end of 2017. The table below shows annual total returns from the start of 2008 to the end of 2017.

FTSE 100 annual total returns 

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-28.3% 27.3% 12.6% -2.2% 10.0% 18.7% 0.7% -1.3% 19.1% 11.9%

Source: FTSE Russell 

Looking at the annual returns over that period, we can see that the index had some good years, some average years and one terrible year.

For example in 2008, we had the Global Financial Crisis (GFC) and the FTSE 100 returned -28.3% for the year. £10,000 invested at the start of 2008 would have been worth just £7,170 by the end of the year.

On the other hand, over the 10-year period there were three years where the index performed particularly well, returning 27.3%, 18.7% and 19.1% in 2009, 2013 and 2016, respectively.

Overall however, for the total period to the end of 2017, the FTSE 100 index generated a total return for investors of 74%. While that’s not a terrible return, it’s not overly impressive either. On an annualised basis, that equates to a return of just 5.7%. That’s significantly below the 8-10% return that many investors were probably expecting.

Now, obviously, that’s just one 10-year period in history. And the returns for this were dragged down significantly by the performance of global markets during the GFC. A market event like that doesn’t come along very often. Yet the key takeaway here, in my opinion, is that investors shouldn’t bank on the FTSE 100 returning 8%-10% per year. It may return this figure over some time periods, but at other times it may underperform. So how can investors improve their returns?

Higher returns

One option is to consider adding exposure to faster-growing mid-cap stocks through the FTSE 250. This index holds the 250 largest companies outside the FTSE 100. Its 10-year performance is shown below.

FTSE 250 annual total returns 

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-38.2% 50.6% 27.4% -10.1% 26.1% 32.3% 3.7% 11.2% 6.7% 17.8%

Source: FTSE Russell 

While this index did fall harder than the FTSE 100 in 2008, it also rebounded more powerfully in 2009. It has also generated some fantastic performances over the decade, returning over 25% annually on four separate occasions. Even with the big fall in 2008, the index generated a total return of 158% for the 10-year period which, on an annualised basis, equates to an excellent return of 9.9% per year. That’s significantly higher than the return from the FTSE 100 over the same period.

The lesson here is that if you’re looking to achieve strong long-term returns from the stock market, don’t limit your exposure to the FTSE 100. Consider adding FTSE 250 stocks to your portfolio if you’re looking to generate returns of 8%-10% per year from the stock market over the long run.

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This 6%+ yielder is too cheap to miss!

I’ve been a fan of eSure Group (LSE: ESUR) for a very, very long time.

A backdrop of rising car insurance premiums supported a scenario of solid and sustained profits growth, but this was not the main reason I was compelled to champion the FTSE 250 component. Rather, its ability to grab market share from its rivals was what really appealed to me.

Market appetite for eSure has eroded over the past year as investors have fretted over the increasing competitive pressures washing over the motor insurance segment. While I wouldn’t say I was unconcerned, I reckon that this particular stock has the smarts to overcome this scenario and keep delivering delicious shareholder returns.

Policies continue marching higher

Latest trading numbers released by eSure at the start of May reinforced my positive outlook. The insurer saw gross written premiums across the group boom 18% during January-March to £221.2m, helped by a 21% increase in premiums at its Motor division to £201.4m.

Although the business highlighted the increased competition it’s facing, this factor didn’t stop the number of customers on its books from surging again. It had a total of 1.96m policies up and running as of March, up 17% year-on-year.

The numbers paid testament to eSure’s ongoing bid to boost its footprint and have left it “well placed to deliver profitable growth in 2018,” according to temporary chief executive Darren Ogden. And the company’s aim to have an aggregated 3m home and motor insurance policies up and running by the close of the decade is looking like a very real possibility. It had 2.43m in force as of the close of March.

To add a cherry on top, eSure’s head advised that it “remains on track to achieve a combined operating ratio similar to 2017” in this month’s latest update. This improved to 96.7% last year from  98.8% back in 2016.

Rising dividends = remarkable yields

eSure paid a special dividend in 2017 to keep the annual dividend locked at 13.5p per share. With earnings expected to keep rising and cash flow remaining strong, the City is anticipating further special rewards in the near term and beyond, estimates that nudge payout projections above last year’s levels.

An expected 8% earnings bounce this year results in an anticipated 14.4p dividend, meaning the yield stands at an eye-watering 6%.

And with an 11% profits boost expected in 2019, a dividend of 15.9p is being predicted. Consequently the yield marches to an excellent 6.7%.

I understand that many of you may not share my enthusiasm for eSure. However, those fearful over the impact of intensifying competition on the firm’s future profits can take some solace in an ultra-low forward P/E ratio of 11.5 times.

In fact, this undemanding multiple leaves plenty of upside should — as I fully expect — eSure continue to report exceptional business growth.

Buy-And-Hold Investing

Our top analysts have highlighted five shares in the FTSE 100 in our special free report “5 Shares To Retire On”. To find out the names of the shares and the reasons behind their inclusion, simply click here to view it immediately with no obligations whatsoever!

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Royston Wild 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.

Why the Centrica share price still looks a far safer bet than bitcoin

A stock price graph showing growth over time

Having fallen by 28% in the last year, the performance of shares in Centrica (LSE: CNA) has clearly been hugely disappointing. The company has experienced challenges in parts of its business, while regulatory risk has caused investor sentiment to weaken.

However, the company’s recent update suggested that it may be in the process of delivering improved performance. With a turnaround strategy in place, it could offer a better investment opportunity than the perennially volatile virtual currency bitcoin.

Improving outlook

Centrica’s recent trading update stated that performance in the year to date has been in line with expectations. Encouragingly, it has seen the rate of net consumer customer account losses fall in recent months. This is despite high levels of competition remaining in its core markets. And with it delivering growth in its Connected Home and Distributed Energy & Power businesses, it remains on track to deliver on its 2018 growth targets.

Furthermore, the company is set to deliver its next phase of cost efficiency. It anticipates that efficiency savings of £200m will be delivered in the current year as part of the company’s increased £1.25bn per annum cost efficiency programme. And with its bottom line forecast to rise by 5% in the current year, it could become a turnaround opportunity over the medium term.

Income potential

Of course, one of Centrica’s major attractions for investors is its dividend yield. In the current year it is expected to be 8.1%, which is more than three times the current rate of inflation. Although dividends per share are expected to see a modest fall in 2019, the stock is still expected to deliver an income return of 7.7% next year. And with dividends due to be covered 1.2 times by profit this year, the sustainability of its shareholder payouts may be higher than the market currently anticipates.

Since Centrica trades on a price-to-earnings (P/E) ratio of around 12, it seems to offer good value for money. Certainly, the potential for regulatory change and the uncertainty of its updated strategy delivery could mean that it is more volatile than it has been in the past. But its investment outlook still appears to be promising.

Volatile outlook

In terms of its risk/reward ratio, Centrica appears to offer greater appeal than bitcoin. The virtual currency has experienced a hugely volatile period in recent months which has seen its value more than halve since the latter part of 2017. And while there is the potential for it to make strong gains in a short period of time, there is also an equal chance of further declines over the medium term.

With a lack of income prospects and uncertainty regarding the potential for new regulation, bitcoin appears to be a speculative opportunity, rather than a possible investment for the long term. Due to the upside potential on offer in shares such as Centrica and a number of its FTSE 100 peers, there should be superior risk/reward ratios on offer outside of the cryptocurrency space at the present time.

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Peter Stephens owns shares of Centrica. 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.

Can Anglo American continue to outperform the FTSE 100?

FTSE 100 miner Anglo American (LSE: AAL) has been one of the strongest performers in the UK’s leading blue-chip index over the past year. Its shares have gained nearly 68% in the past 12 months, against a rise of just 3% for the FTSE 100. Can the miner continue to outperform the index, or is the stock overdue for a correction?

Trade tensions

Anglo American shares appear to have hit a stumbling block this week. After rallying strongly since the beginning of the year — and looking like £20 a share might finally be in sight — the shares have pulled back over the past week to 1,768p after a top-out at 1,933p on Tuesday.

The company is not alone, however, as shares across the mining sector have been hit this week amid rising trade tensions following a US probe into automotive imports that could lead to new tariffs.

Fundamentals

Certainly, it’s hard to ignore the risks of a trade war, given the potential implications for the global demand for commodities, but aside from recent trade fears, fundamentals are broadly supportive. With resilient global growth, demand across almost all commodity groups has picked up, driving commodity prices higher.

Anglo American has also been making substantial progress in what it can actually control — cutting costs, reducing debt and growing production. Its financial performance has improved markedly, yet its shares trade at a significant discount to its peers.

Valuations

Anglo American shares trade at just 9.9 times its consensus analysts’ forecast for earnings this year, while the sector is on average valued at 12.4 times forecast earnings. On free cash flow, things look even cheaper, with the stock valued at 6.6 times its forecast free cash flow in 2018, against the sector average of 9.1 times.

What’s more, due to its attractive free cash flow, the stock also offers exciting dividend growth potential. City analysts expect dividends per share to rise by as much as 11%, giving it a prospective forward yield of 4.8%. With such tempting income prospects and low valuations, I reckon a re-rating of its shares could quite possibly lie ahead.

Another momentum play?

Another top performer from the FTSE 100 worth watching out for is EVRAZ (LSE: EVR). The steel-maker and miner, which is part owned by Russian billionaire Roman Abramovich, is also benefiting from an upswing in the global commodity markets.

Amid rising prices, net profit swung from a loss of $188m to a profit of $759m last year. Encouragingly, particularly for income investors, free cash flow more than doubled from $659m in 2016, to $1.32bn.

Dividend policy

With net debt falling and the group’s balance sheet in much better shape, the company has returned to paying regular dividends. EVRAZ paid $0.60 per share last year, and looking ahead, the company aims to pay a minimum amount of $300m per annum going forward.

This gives it a minimum payout of $0.21 per share, but City analysts expect it to be more generous. The consensus forecast is for a payout of roughly $0.60, earning shareholders a potential yield of 8.6% this year.

On the downside, investors would need to be wary of geopolitical risks, on top of the usual commodity sector risks. Given that nearly half of its revenues comes from Russia and Ukraine, the company is not only exposed to a higher level of currency volatility, but also potential sanctions and trade risks.

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Jack Tang 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.