After a 10% resurgence in 2021, British engineering company Rolls-Royce (LSE:RR) looked set to carry this momentum forward to 2022. But its share price is down a whopping 28% this year. Analysts say this is a result of the Omicron spread, escalating political tensions and CEO Warren East’s decision to quit the company at the end of 2022. Now trading as a penny stock, is the Rolls-Royce share price the best long-term FTSE 100 bargain for my portfolio right now?

Steady improvements

While the pandemic hit the aviation industry hard, 2021 was largely a year of recovery. Rolls-Royce reported a marked increase in flying hours in the second half of 2021, which helped the company edge closer to a positive cash flow. With the civil aviation sector still a long way off pre-pandemic levels, the company also went through a massive restructure in a bid to diversify its income stream.

The company shed nearly 9,000 staff members, sold smaller holdings and streamlined the aerospace arm of the business. But since large planes were still mostly grounded last year, civil aviation recorded a net loss of £172m last year. But this is a vast improvement from the £2.5bn net loss in 2020, thanks to the restructuring efforts.

Overall, Rolls-Royce managed to generate an operating profit of £414m in 2021 primarily due to its defence wing. In fact, global weapons spending has increased a lot in the last decade and Rolls-Royce benefited from this. Defence equipment sales generated £457m last year and the current order book value stands at £6.5bn.

Prolonged recovery

But I see a big concern with the Rolls-Royce share price at the moment. The company still has a huge debt pile. Although recent disposals are expected to generate around £2bn in proceeds, the current debt pile stands at a whopping £5.2bn. Given how volatile the share price has been over the last 24 months, I think even a slight misstep by the company or another Covid setback this year could force a panic-sell.

While this is a concern for me, I’m looking at a long-term play with the Rolls-Royce share price. And I think the company has some impressive projects that are coming to fruition at the right time.

With the electric vehicle (EV) revolution under way, Rolls-Royce is pioneering an electric aircraft that has already broken three world records for being the world’s fastest all-electric aircraft. And this project already has pre-orders worth $5.2bn from some of the largest commercial airlines in the world. If this project takes off, RR could attain Tesla-like status in the electric aircraft space.

The company is also developing Small Modular Reactors (SMRs) to create remote power stations that can generate clean energy.  The board expects first orders in a couple of years and grid integration in the UK in the 2030s. As of now, one SMR can produce 230 tonnes of clean Hydrogen fuel a day.

Both the EV and green energy sectors are expected to grow significantly in the next decade. And given RR’s history of engineering R&D, I think it is a real possibility that these projects successfully reach the market. Although the Rolls-Royce share price is volatile right now, I see a lot of long-term potential here. I would consider an investment if the share price falls below 80p in the coming weeks.

Suraj Radhakrishnan 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.

In the grand scheme of things, the current carnage on stock markets plays second fiddle to the tragedy in Ukraine. Yet there are a lot of worried share investors out there following the recent market correction. The FTSE 100 has fallen to five-month lows and there’s a good chance it could continue to slide too.

Many investors are caught between whether to hang on to their shares or to sell up until things become clearer. There are other more optimistic investors who are using recent share price crashes as an opportunity to hunt for bargains.

Here’s what I’m doing today

As a long-term investor I’m not planning to sell my holdings. There’s no guarantee that stock prices will bounce back, of course, but history shows that markets always have done after geopolitical and macroeconomic crises. By selling today, I’d forfeit the possibility of seeing the value of my portfolio rocket when market confidence finally recovers.

In fact, I think now could be a good time to be proactive and to buy more UK shares for my portfolio. A lot of quality companies with strong long-term earnings outlooks have sunk in value during recent market volatility. Today I have a chance to snap them up at a discount. Many now trade on rock-bottom earnings multiples. A large number also carry giant dividend yields that I myself find hard to ignore.

2 FTSE 100 dividend stocks to buy

There are plenty of companies on the FTSE 100 alone that boast spectacular dividend yields. Here are two that I’m considering snapping up today.

Persimmon (10.2% yield)

Housebuilder Persimmon’s slumping in value as the cost of living crisis worsens. Energy and foodstuff prices are soaring due to the Ukraine crisis and it’s possible that this could hit homebuyer appetite in the months ahead.

It’s my belief that this threat is baked into Persimmon’s share price, however. As well as that huge dividend yield, the firm now trades on a rock-bottom forward P/E ratio of 9.3 times.

As an existing owner of housebuilding shares I’m encouraged by the resilience of the UK homes market despite the problem of soaring inflation (property prices rose at their fastest pace since 2007 in February, according to one survey). And I’m expecting them to remain solid for years to come too, with low interest rates continuing to drive demand far above supply growth.

Legal & General (7.7% yield)

Financial services giant Legal & General Group also offers an attractive combination of big dividend yields and low earnings multiples. It trades on a P/E ratio of just 7.4 times for 2022.

I think this low rating fails to reflect Legal & General’s terrific growth opportunities. Demand for its investment services will remain high as individuals seek out decent returns on their cash in a low-interest-rate environment. Furthermore, activity at its retirement and pensions businesses should grow robustly as populations in its markets rapidly age.

Legal & General would likely suffer if the global economy sinks again. But I think the potential long-term benefits of owning this FTSE 100 share still makes it a top buy for me right now.

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.

Shares in Cineworld Group  (LSE:CINE) have had a miserable time lately. In May 2017, the shares traded at just over 726p. As I write, they trade at around 31p. That’s quite a decline. To me, it prompts the question: how low can the Cineworld share price go?

Why did it fall?

The reason for the precipitous fall in the Cineworld share price is fairly straightforward. Quite simply, going to the cinema became difficult or impossible during the global pandemic. As a result, Cineworld was unable to generate revenue, but still had costs associated with its business. Worse still, streaming services have made films available to viewers without them needing to leave the house. 

According to management, though, there is reason for optimism. One source of optimism is a promising line-up of films set to premiere in 2022. Another is the idea that people signing up for streaming services have increased their interest in films, making people with streaming subscriptions more likely to visit the cinema. A third is the investments that Cineworld has been making in order to make its experiences more immersive than watching films on TV.

The company’s stock, however, seems unaffected by this optimism. Over the last week alone, Cineworld shares lost around 24% of their value. They seem to me to be heading downwards with no signs of reversal. So let’s take a look at what might stop the slide in the Cineworld share price.

Fundamentals

The most obvious thing that might stop such a slide is support from its balance sheet. If a company’s stock falls far enough, it might reach the point where the entire company trades for less than its working capital, or the value of its tangible assets. Unfortunately for Cineworld’s shareholders, I don’t see how either of these is likely to provide valuation support for the stock.

In the case of working capital, Cineworld’s is negative. By itself, this isn’t a problem. In some cases, it can be a good thing. Companies such as Amazon.com employ a negative working capital model as part of their business plan and do so very successfully. But for a company like the cinemas giant, negative working capital means no possibility of the decline in its share price being stopped by the stock sliding below the company’s working capital.

I think that something similar might be true of the company’s book value. It does have a positive book value. But the company has taken on so much debt that I struggle to see how its book value will provide any valuation support to its falling share price.

By way of illustration, the amount of interest Cineworld pays on its debts has increased by around 220% since the end of 2018. Further, the company’s total debt has increased by 113% over the same period. As a result, the book value of the shares has fallen dramatically. With spiralling debts and higher interest payments (even before we get to the issue of rising interest rates) I find it hard to see how its balance sheet provides any valuation support to the falling stock. As I see no limit to how far Cineworld’s share price might fall, I’m staying well clear.

Stephen Wright owns shares in Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon. 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.

So far, 2022 has been a difficult year for stock market investors. At the time of writing, the FTSE 100 is down 7% since the start of the year, the S&P 500 is down 12% and the Nasdaq 100 is down almost 20%. The past year has been good to investors, though, with all three indices seeing positive 12-month charts. Furthermore, the stock market has, over time, always recovered from its losses. So will the stock market recover this time?

Inflation and interest rates

As far as I can see, two things are weighing on stock prices at the moment. The first is inflation and the second is rising interest rates. Both have been impacting the stock market since the beginning of the year and both have now been exacerbated by the Russian invasion of Ukraine.

Inflation has been rising in both the UK and the US. This is the result of supply chain shortages and the printing of money to help during the pandemic. Rampant inflation makes just about everything less affordable. That could mean higher raw materials prices for companies or more expensive everyday essential products for consumers.

To prevent prices from rising too far, central banks in both countries have been raising interest rates. Higher interest rates incentivise people to save their money rather than spending it. It also makes it harder for both consumers and companies to borrow money at attractive rates. This reduces demand for goods, bringing down prices.

The trouble for markets is that rising interest rates creates downward pressure on stocks. They make keeping money in a savings account more attractive. If I can get 2% on my savings, rather than the 0.5% I’ve been getting until now, then I’m going to want a more attractive return on stocks in order to justify the risk of investing in them. This means that I’ll not be willing to pay as much for stocks as I was before, which causes stock prices to fall.

Unfortunately, I believe that interest rates will continue to rise for some time. The Russian invasion of Ukraine has pushed oil prices higher, exacerbating the problems of inflation. If the ambition is to stop inflation by raising interest rates, then I think that the geopolitical situation has made that a lot more difficult. This makes me think interest rates might have to rise more than planned, not less.

When will the stock market recover?

The threat of inflation and rising interest rates make me think that the stock market is unlikely to recover in the near future. But I don’t think that this is an entirely bad thing for me as an investor. A lower stock market means better buying opportunities for investors like me. And while I don’t believe that the stock market will recover much in 2022, I do believe that it will recover eventually. Since I’m investing for the long term, I don’t need to worry about what the price of stocks will be later this year. If I’m right in thinking that the stock market will recover one day, then its decline today is just an opportunity for me to buy good stocks at attractive prices. 

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.

Sometimes, a simple approach can be an effective one. Some people use very complicated passive income plans. But my own favourite source of sweat-free earnings is investing in dividend shares.

Here is how I would use £35 a week — £5 a day – to start setting up what I hope will turn into passive income streams for life.

Dividend shares as passive income ideas

The thing I like about using some spare money to buy dividend shares is that I can earn passive income if the companies do well. By investing in dividend payers like Apple, Shell and Unilever, I hope to be able to benefit from their successful, profitable businesses.

Of course, a business that is profitable today might not always stay that way. That could hurt its ability to pay out dividends in future. That is why I would set up my passive income portfolio to include a range of companies spread across different industries. That way, even if some of them stop paying dividends, hopefully I will still earn passive income from others.

The mechanics of a dividend share portfolio

To do this, I would need some sort of share-dealing account or Stocks and Shares ISA. That would allow me to buy shares, receive any dividends and also to sell if I felt a company’s prospects had changed. I could withdraw the dividends as income, or reinvest them to increase the size of my portfolio and its earning potential.

Putting aside £35 a week, I would save £1,820 in a year. With a typical dividend yield in the FTSE 100 index coming in at around 4%, I would expect that annual saving amount to generate roughly £73 a year in passive income. If I own a share, I should receive any dividends it pays in future. So, in my second year of putting aside £35 a week, not only would I hope to earn more passive income from those savings – I should hopefully still be earning the £73 from my first year’s purchases. So, as the years go by, my passive income streams ought to build up more and more.

Getting passive income for life

Nobody knows what will happen in future. Even long-established companies can stop paying dividends, or go to the wall. However, if I have diversified my portfolio enough, hopefully at least some of them will pay out dividends for decades to come.

That is why I think owning dividend shares could help me set up passive income streams for the rest of my life. If I keep paying in £35 a week, that should increase the size of my portfolio and earnings over time. But even if I stop contributing at some point, as long as I keep the shares I own, hopefully I will still be earning passive income for a long time.

Getting down to business

The theory sounds straightforward – and I think that can be true of the practice too.

But I will not earn a penny of passive income from this plan unless I put it into action. I could do that with my first £35 — starting today.

Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended Apple and Unilever. 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.

It has been an unpredictable few weeks on the stock market. Some shares have seen incredible swings. An example is the metal producer Evraz (LSE: EVR). The Evraz share price is up 20% so far today as I write this, but it has still fallen 85% so far in 2022, and the same amount over the past 12 months.

I think the dramatic movements in Evraz shares recently contain lessons for all investors. Here are two I am applying to my own investing approach.

Yield traps as warning signals

Right now, Evraz theoretically has a 114% dividend yield! In other words, I could more than get my money back in dividends alone within a year, by buying at the current Evraz share price.

In reality, what will happen is anyone’s guess. The company is still due to pay a 50c (roughly 38p) interim dividend this month. The record date is 11 March, which means that if I bought Evraz today then I would be in line for the dividend — if it ends up being paid. It could yet be cancelled and I see that as a real risk.

With a 114% yield on paper, the company currently looks like a classic yield trap to me. A yield trap is a share with a seemingly mouth-watering yield, which in reality could fall in future as it reflects heightened risk.

The lesson I draw here is always to pay attention when a share looks like it could be a yield trap, even on a less dramatic scale. Under a month ago, when Evraz yielded an unusually high 26%, I concluded that “I had decided not to buy it for my portfolio, as it looked too risky for me.” Since then, the Evraz share price has collapsed 70%.   

Political risk is very hard to price

Some of the movements in the Evraz share price recently – and arguably for most of its life so far as a listed company – reflect different investors’ assessments of what are known as political risks that might affect the company.

Such political risks include assets being seized, foreign exchange controls being imposed and contracts being legally voided. Such political risk is far more common than many investors may realise. It is especially common for natural resources companies that do business in countries often with a weaker rule of law than the UK. For example, a long-established company like Antofagasta could see revenues and profits fall if a new Chilean government nationalises mines.

The Evraz share price and political risks

Evraz has always faced sizeable political risk due its areas of operation. In fact, I think its experience of dealing with them could mean the recent share price fall is overdone – but I do not know. As it pointed out in its latest annual report, “Russia is considered to be a developing market with higher economic and political risks.” But there are such risks in its other large markets of Canada and the US too.

Political risk is very complicated to assess in advance, even for professional investors. I think most private investors lack the insight or tools to assess it accurately. So if a company faces unusually high risks like this, that will already often place it outside what I regard as my circle of competence as an investor. On that basis alone, I would not invest.

Christopher Ruane 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.

Hydrogen energy specialist ITM Power (LSE: ITM) has been disappointing for shareholders over the past year, losing 14% of their value. But in the past fortnight or so, the shares have soared by 66%.

What is going on with the ITM Power share price?

No obvious news flow

There is no obvious business reason for the share price surge that I can see. The company has not announced any big business developments or contract wins over the past few weeks. The last such news came in late January, with the sale of an electrolyser for a power station in Norway.

Nor was there any notable director purchases of shares lately, although there have been some small purchases through an employee share incentive scheme. The last substantial director buys of ITM Power shares on the open market were last year.

So I reckon the most likely explanation for the surge in the ITM Power share price over the past couple of weeks is that energy security concerns from the war in Ukraine have led investors to put money into possible alternative energy sources. As the Norwegian sale demonstrates, ITM Power could be seen as being able to supply an alternative to oil and gas.

Is the ITM Power share price surge justified?

If that is indeed the reason for the price surge, it seems pretty speculative to me. After all, ITM Power’s business looks pretty much the same as it did last month. While there may be an increase in demand for hydrogen energy in future, I think that was already priced into the share price. Its whole business model has relied on increased future adoption of hydrogen energy by its target customer base, after all.

A 66% increase is not a small boost. It suggests a radical revaluation of a company’s business prospects. But I already felt the share price was hard to justify before the surge. Now, the loss-making company has a market capitalisation of £2.3bn. But last year it only had sales revenues of £4.3m and it reported losses of £27.7m. To me, the price already looked stretched before the latest move up. It looks even more overvalued now.

My next move

A 66% increase in a couple of weeks could offer an incredible return for a shareholder. But I am an investor, not a speculator. So I do not try to time the market or jump in and out of shares on a short-term basis expecting a share price swing.

Instead, I try to find companies with proven cash generative business models that are trading at attractive valuations. From a positive perspective, ITM Power does have promising technology in an industry that might see a demand boom in coming years. That could help it boost its revenues. Economies of scale might turn its sizeable annual loss into a profit.

For that to happen, though, a lot needs to go right. Given its small revenues, largely unproven commercial strategy and lack of profitability, I think the company’s market capitalisation is too high to justify. What goes up quickly can sometimes come back down just as fast. Despite the surging share price, I will not be buying ITM for my portfolio.

Christopher Ruane 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.

Was this article helpful?

YesNo

BP (LSE: BP) shares are up around 22% over the past six months. As the price of oil has surged to a multi-year high, investors have been buying into the stock expecting further profit growth. Over the past six months, shares in the oil and gas company have outperformed the wider FTSE 100 index by 24%.

Over the past year, the FTSE 100 has returned 4% excluding dividends, compared to 15% for BP shares. 

However, despite this impressive performance, I think the stock does not yet reflect the company’s growth potential over the next couple of years. As such, I believe there is still time to buy the investment for my portfolio. 

The outlook for BP shares

Shares in the oil giant have come under pressure recently due to its exposure to Russia.

The group did have a significant stake in one of the country’s largest oil producers, Rosneft. Management has declared that the company will exit this stake. The cost of doing so has been pegged at $25bn.

Understandably, some investors have been put off by this loss. The stock dropped around 10% in the days after the firm announced the divestment.

BP could not really hold on to the position considering the current geopolitical situation. It really had to exit the holding. The good news for investors is that this $25bn figure is unlikely to have a significant impact on the company’s operations. Foreign exchange losses will make up around half of the loss. The rest will be an adjustment to the value of the holding. The loss will be a balance sheet adjustment, and it will have a minimal impact on the corporation’s earnings. 

That said, for 2021, the Rosneft stake paid BP $1bn in dividends. Compared to the company’s overall net profit of $7.6bn, that is a significant figure. 

However, City analysts are forecasting $14.5bn of profits for the company this year. Higher oil prices, in general, will offset the lost income from the Russian holding. 

Undervalued

Further, the stock is currently trading at a forward price-to-earnings (P/E) multiple of 6. I think this takes into account the loss of earnings and does not factor in any potential earnings growth. As well as this low valuation, the stock is also set to yield 4.7% in 2022. 

Having said all of the above, I should acknowledge that the oil price is highly volatile. If the price of ‘black gold’ suddenly collapses, BP shares could face significant selling pressure as analysts will have to revise their growth projections lower. The company may also face substantial financial liabilities for its role in the global climate crisis. 

I think these are the most significant risks the enterprise faces today, and I will be keeping a close eye on them as we advance. 

Despite these challenges, I think the company looks undervalued compared to its potential over the next couple of years. Therefore, I would be happy to add BP shares to my portfolio today as a growth and income play. 

Rupert Hargreaves 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.