Peloton (NASDAQ: PTON) stock soared in trading yesterday as rumours circulated that sportswear giant Nike and online retail juggernaut Amazon were considering bidding for the battered fitness firm. Does it make sense for a Foolish UK investor like me to climb on board for the ride?

Reasons to buy

Despite having been a Peloton sceptic for a long time, I don’t think this company is without merit. 

Its flagship bikes are undeniably beautiful bits of kit. Like any other premium brand, I can still see some people wanting one for the image it projects. That’s regardless of how often they actually intend to use it. And a few businesses may consider that to be worth (quite a bit) more than the $10bn valuation it now trades for. 

There’s also little doubt in my mind that the industry is only likely to go from strength to strength in the years ahead. The evolution of smart health-related tech shows no signs of slowing. The influence of social media will surely play a role in pushing more people to improve their fitness too. 

The idea of a heavyweight like Amazon or Nike acquiring the company could also attract other potential suitors to the fray. Apple‘s name was bandied about when Peloton stock first began its awful slide. Having seen it now tumble 80% in one year (even after yesterday’s 21% rise), the Cupertino-based business could now throw its cap into the ring.  

Reasons to steer clear

But let’s come back down to earth for a second. 

One of my biggest gripes with Peloton as an investment is that, aside from aesthetics, I’m not seeing much to separate it from the competition. There’s no ‘moat’ here, to coin a term from Warren Buffett. The fact that Peloton has now cut the price of its equipment on multiple occasions only serves to confirm this.

It’s also a sign that the trend for more people exercising at home may be coming to an end at the same time as the pandemic. Gyms bring an element of socialisation to fitness that staring into a screen can’t. That will be the case no matter how interactive Peloton tries to make its classes.

On top of this, Peloton has already faced a lot of negative publicity as a listed company. These have ranged from the highly serious (product recalls following injuries to pets and children) to the frankly ludicrous (TV shows featuring characters having heart attacks while using its machines). That’s hardly what I like to see as a prospective investor.

So, will I buy Peloton stock today? 

It will be fascinating to see how all this plays out. Amazon clearly has sufficient clout to revitalise the company whereas Nike has arguably better knowledge of the industry. 

Then again, yesterday’s initial excitement could easily dissipate just as soon as it arrived. After all, there’s no guarantee of a bid from either business materialising. In such a scenario, I’d be left holding stock in a company with dwindling revenue and a challenging outlook. That smacks of gambling to me. And that’s not the Foolish way.

I won’t be buying Peloton stock. Instead, I’m inclined to keep my powder dry for other opportunities.

If I were to buy a sold-off share, it would probably be this one. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Apple, Nike, and Peloton Interactive. 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.

The idea of making passive income from dividend stocks is one that has been very popular in recent times. It taps into my desire to make my money work harder, especially with years of very low interest rates. Even though the idea is simple, there are a few points that aren’t immediately apparent or clear. So before getting started, here are a few of my top tips to understand.

Understanding the numbers

First up is the understanding of how a dividend yield works. It’s a percentage that reflects the dividend per share relative to the current share price. When I buy a stock, the share price gets fixed at that point in time. But the dividend per share will vary as time goes on. So if I see a company that has a very high yield (such as 10%), I do need to take it with a pinch of salt. I can’t guarantee passive income of 10% of whatever amount I invest. 

Rather, I’d look for companies that have sustainable yields, or those that have grown the dividend payment over several years. Two good examples that I wrote about recently are Unilever and British American Tobacco.

A second point is to grasp that aside from the yield, what really matters is how much I can afford to invest. Finding a gem of a dividend stock is great, but if over the next year I’ll only have £100 of spare cash, the passive income won’t really make much of an impact. In this case, I might be better targeting high-growth stocks, that could offer me strong profits over time from share price appreciation.

Careful planning to receive passive income

Thirdly, I need to understand how the dividend payments work. Typically, the company will declare the intent to pay a specific dividend. Next, there will be an ex-dividend date. This means that I need to own shares in the business before this date passes in order for me to receive the dividend on the later payment date. I can’t simply buy a stock the day before the payment date and expect to receive the passive income. 

This requires careful planning on my side. It also leads on to my fourth point — my passive income is unlikely to be flowing every week. Each stock I hold might pay a dividend annually, semi annually or quarterly. Therefore, if I want to receive a stream of income, I’m best off investing in a portfolio of multiple stocks. For example, if I own a dozen stocks, there’s a good chance that each month I’ll receive some form of payment.

Finally, I should be conscious that alongside the dividends, the share price moves everyday. This means that on top of the income, I could generate a profit or loss from my capital when I come to sell the stock. This makes it even more important to identify solid long-term shares that can help me not only enjoy dividends but also share price growth.

Jon Smith has no position in any shares mentioned. The Motley Fool UK has recommended British American Tobacco 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.

Was this article helpful?

YesNo

Was this article helpful?

YesNo

I own shares of Citigroup  (NYSE: C) in my portfolio and there are three reasons for thinking that it might be the best passive income stock that I hold. The company is a global provider of consumer and institutional banking services and for a start, its shares trade at a significant discount to their tangible book value. Second, the company is restructuring to improve its efficiency. And third, I think Citigroup’s dividend yield is attractive and has potential to grow.

Valuation

I think bank stocks are among the best passive income ideas for investors like me and that Citigroup shares trade at an attractive valuation. The current price is just under 75% of the tangible book value, which is significantly lower than other US banks. JP Morgan, for instance, trades at 179% of its book value. This is partly because Citigroup has significantly underperformed its peer in recent years. Its average return on equity over the last decade is around 6%, compared to 13% for JP Morgan.

But I think that its valuation prices this in. I would value US bank stocks by dividing the return on equity by the price-to-book (P/B) multiple. This calculation yields a return of 8% for Citigroup and a return of 7.26% for JP Morgan. Furthermore, while there’s an obvious risk that it will continue to underperform, I see reason to think that management is making moves to prevent this.

Restructuring

On the recent earnings call, management announced plans to wind down its consumer banking operations in 13 countries where it doesn’t have the scale to compete effectively. The aim is to allow it to concentrate its resources in the areas that provide the strongest returns. There’s clearly risk involved in this strategy, since winding down its consumer operations will incur costs. But I think its low valuation offsets this risk. I also feel the proposed restructuring gives the shares significant upside potential both now and in the long term. 

For now, management has said that winding down these businesses should free up additional capital. And I hope some of this might be returned to shareholders, either via dividends or share repurchases. In the longer term, concentrating on businesses with better prospects should help Citigroup improve its overall returns. 

Dividends

At current prices, Citigroup’s dividend yield is around 3%. As the company restructures, I hope this return will increase, again, either by distributing funds directly as dividends, or by repurchasing shares. I’d like to see it use its cash to fund share buybacks. While the stock trades below tangible book value and could continue to do so, buying back shares increases the book value of the remaining shares and increases the share of the distributed money that each holder receives. 

In my view, the combination of a low valuation, a promising restructuring process, and an opportunity for shareholder returns makes Citigroup the best passive income stock in my portfolio.

Stephen Wright owns shares of Citigroup. Citigroup is an advertising partner of The Ascent, a Motley Fool company. 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.

Many people believe a stock market crash could be on the horizon. With this in mind, I am earmarking certain stocks I would add to my holdings if they were to cheapen due to any forthcoming crash. Britvic (LSE:BVIC) is one such stock.

Stock market crash ahead?

A geopolitical issue, which could lead to war, could cause stock markets to crash across the world. This is especially the case when world superpowers are involved. There are currently escalating tensions between Russia and Ukraine. To help avoid conflict, other countries, such as the US, have become involved to mediate a solution and avoid a war.

From a macroeconomic perspective, when world leading economies are struggling or inflation is soaring out of control, a crash could occur. The US and China, two of the world’s premier economies, are struggling with their own respective issues.

China is in the midst of a real estate crisis and has seen its growth, measured by gross domestic product (GDP), slow to levels not seen for some time.

The US is struggling with inflation issues. A rise in consumer prices to levels not seen since the 1980s is causing concern among economists. In 1982, when the Consumer Price Index (CPI) rose to levels seen recently, the stock market crashed. 

It is worth noting nobody can actually accurately predict if a stock market crash will occur or not.

A stock I’d buy

Britvic is a branded soft drinks producer and a major player in the UK market. It also has a global reach with operations in Ireland, France, and Brazil. Some of its most prominent brands include J20, Robinsons, and Tango. It also has an exclusive agreement with giant PepsiCo.

As I write, Britvic shares are trading for 910p. At this time last year, the shares were trading for 785p, which is a 15% return over a 12-month period. When the 2020 stock market crash occurred, shares dipped but have recovered strongly close to pre-pandemic highs. I believe they could do something similar if another market downturn were to occur.

Britvic has an excellent track record of performance. I do understand that past performance is by no means any guarantee of the future, however. Looking back, revenues have been consistently over £1.4bn for the past four years. Levels in 2020 and 2021 were slightly lower than in 2018 and 2019 due to the effects of the pandemic.

Coming up to date, Britvic released a Q1 report released last month which was excellent, in my opinion. Total revenue increased by 16.5% compared to the same period last year. In-home revenue grew and out of home channels continued to recover towards pre pandemic levels. International markets also saw growth in sales and revenue.

Britvic shares could also make me a passive income. It currently sports a dividend yield of close to 3%. The shares look reasonably priced right now with a price-to-earnings ratio of 23. Any market crash could cheapen shares, making them more enticing. It is worth noting that a crash could also lead to cancelled dividend payments, however.

Britvic does face headwinds in the form of supply chain issues, and inflation is driving up the cost of raw materials it needs. In addition to this, competition in the drinks sector is also intense. All these factors could affect performance and investment viability.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Britvic. 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.

Key points

• The IAG share price should benefit from the large-scale reopening of international borders
• The company is undervalued and has a competitive price-to-earnings ratio
• Passenger numbers are now increasing with each quarter 

Every airline in the world has suffered over the past two years. This is because of the pandemic leading the world to effectively shut down for a prolonged period of time. International Consolidated Airlines Group (LSE: IAG) is no exception. Operating globally, it owns British Airways, Aer Lingus, and Vueling to name only three of its brands. The pandemic is beginning to subside and international travel is returning. I want to know if the IAG share price could actually double this year. Let’s take a closer look.   

Mixed fundamentals

One of the best markers for judging the growth potential of a stock is by looking at its price-to-earnings (P/E) ratio. This tells us if a company is over- or undervalued. IAG’s current P/E ratio is 2.13. By way of comparison, Air France-KLM, a major competitor, has a P/E ratio of 11.76. With the former’s figure so low, this suggests to me that the IAG share price is undervalued.

Furthermore, IAG has a debt ratio of 70.2%. This is the proportion of the company’s assets funded by debt. This comes in slightly higher than easyJet (LSE: EZJ), that has a debt ratio of 62.81%. Indeed, IAG’s debt pile is not insignificant and amounts to £20.9bn.

On the flip side, the company has retained earnings of 6.93p per share, which it may use for further acquisitions. One such endeavour was the takeover of Spanish airline Air Europa. This was terminated in December 2021 because of the pandemic’s impact on IAG’s finances. The takeover does, however, remain a possibility in the near future and would increase the stock’s Spanish presence, along with its Iberia brand.  

Could the IAG share price really double?

An important benchmark for gauging how far the airline industry has rebounded since the pandemic is passenger numbers. In its third-quarter results in 2021, IAG reported a capacity increase of 43% compared with the same period in 2019. This was an improvement on the 2021 second-quarter figure of 22% with the same period comparison. 

Furthermore, Switzerland is currently consulting on whether it should remove all entry requirements for tourists, regardless of vaccination status. If an affirmative decision is made on 16 February, many other countries may follow. This will inevitably be positive news for the IAG share price, because it further eases international travel.

The pandemic recovery period we are now entering has also given investment banks cause for optimism in the airline sector. Morgan Stanley recently stated that the “easing of travel restrictions in the UK and Ireland will drive strong pent up demand”. It also placed a target price of 250p for IAG shares, when it is currently 157p. Although JP Morgan expressed a general preference for short-haul carriers, it writes that “IAG should benefit from the reopening of transatlantic travel and a pick-up in corporate travel”.   

Having held this stock for the entire pandemic, I’m optimistic about its prospects. I think the international reopening of borders will do great things for the IAG share price. This, together with its competitive P/E ratio, may well lead the shares to double in value. I will be adding more to my portfolio. 

Andrew Woods owns shares in IAG. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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 35 years as an investor, I have had one big hero. He is American mega-billionaire Warren Buffett, nicknamed the ‘Oracle of Omaha’. Buffett’s personal fortune exceeds $114bn, despite having donated $45bn to good causes. In 80 years of investing (since the age of 11), Buffett is widely regarded as the world’s best value investor. Here are three quality shares that I don’t own, but believe Warren Buffett would be happy to buy today.

Warren Buffett share #1: Lloyds Banking Group

In his 2008 letter to Berkshire Hathaway shareholders, Warren Buffett wrote, “Price is what you pay; value is what you get”. For me, shares in Lloyds Banking Group (LSE: LLOY) appear cheap today. As I write, Lloyds shares trade at 52.5p, valuing the bank at £37.3bn. That’s a modest price tag for a group with 30m customers, 65,000 staff, and a host of market-leading brands. Also, Lloyds is the UK’s top mortgage lender and a leading provider of credit to businesses and households.

Despite this, Lloyds shares don’t look expensive to me. They trade on eight times earnings and offer an earnings yield of 12.5%. During 2020’s Covid-19 crisis, Lloyds cancelled its dividend, before restoring it in July 2021. Though Lloyds’ dividend yield is just 2.4% a year, analysts expect it to rise. I suspect that such undemanding fundamentals would appeal to Warren Buffett’s value instincts. However, Lloyds could suffer steep loan losses were Covid-19 to make another comeback.

Great business #2: Diageo

Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. In other words, it’s worth paying premium prices for quality stocks. Take this brilliant British business: drinks giant Diageo (LSE: DGE). Diageo sells more than 200 drinks brands in over 190 countries, including gin, whisky, vodka, and rum. Some of its top brands date back four centuries.

As I write, Diageo shares trade at 3,806.18p, valuing the business at £88.3bn. That’s big enough for Warren Buffet to buy a decent stake in. Today, Diageo stock trades on 29.3 times earnings, with an earnings yield of 3.4%. The dividend yield is under 2% a year, making Diageo fairly expensive in FTSE 100 terms. But it has a wide ‘competitive moat’ around its business, which Buffett loves. Then again, if coronavirus surges and spoils the party, then Diageo’s sales could plunge — as happened during earlier lockdowns.

Quality stock #3: Unilever

Warren Buffett also said, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”. Consumer-goods Goliath Unilever (LSE: ULVR) is one great business whose shares slipped in 2021-22. Over the past year, Unilever shares have tumbled from a high of 4,388p on 20 July 2021 to a low of 3,450p on 19 January. As I write, they trade at 3,865.50p, valuing the group at £99.4bn — a market super-heavyweight. As with Diageo, I like Unilever for its veritable warehouse of household brands. One in three people worldwide use Unilever products every day. Wow.

I know Warren Buffett also admires Unilever, because he tried to buy it in January 2017. Today, Unilever trades on 22.2 times earnings, for an earnings yield of 4.5%. The dividend yield of 3.8% a year is broadly in line with the wider FTSE 100. However, Unilever’s sales growth has slowed lately, dropping to 1.9% in 2020. Even so, I’d happily buy and hold this quality company for the long term!

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Lloyds Banking Group, 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.

ITM Power (LSE:ITM) shares have been on a downward trajectory for some time. Is the current falling share price an opportunity to get a bargain for my holdings?

The ITM Power share price continues to fall

ITM Power manufactures hydrogen fuel cells. These energy solutions are designed in a way to meet requirements for energy services and help the production of clean fuel for transport as well as renewable heat and chemicals.

ITM shares have been on a downward trajectory for some time now. As I write, the shares are trading for 258p. At this time last year, the shares were trading for 645p, which is a 60% drop over a 12-month period.

I believe ITM shares have declined due to ongoing fears of losses that the firm have been reporting and could continue to report. This has led to many investors selling the shares, which has affected investor sentiment and driven down the price.

For and against investing

FOR: Despite recent losses, ITM has recorded an improvement in revenues. In a half-year report released at the end of January, ITM reported revenues of £4.2m. This was up from £200,000 in the same period last year. The results last year, however, were affected by the pandemic. Increasing revenues is usually positive, and tells me that ITM could eventually turn losses into a profit, over time.

AGAINST: Losses reported in recent times by ITM, due to operational costs and the scaling up of the business cannot be ignored. In fact, the losses seem to be increasing as per the half-year report mentioned above. ITM revealed that losses before tax increased to £15.3m compared to £12m in the same period in 2020.

FOR: The renewable energy market, and specifically the hydrogen market globally, is set to grow exponentially over the coming years and decades. This is due to a renewed global focus on cutting carbon emissions and tackling climate change. It is said that 90m tonnes of the gas is currently used but by 2050, the Hydrogen Council reckon demand could reach as high as 500m and 550m tonnes by 2050. Operating in a growth market could help boost the ITM Power share price.

AGAINST: It looks like ITM won’t be a profitable business anytime soon due to its vast operating expenditure and associated costs. Losses are set to continue for the next few years as well. Forecasters are expecting losses of around £30m for the next three years. Of course, these are just forecasts and things could change. Another factor putting me off is the intense competition in the hydrogen market. There are many firms vying for supremacy with potentially better technology and lower operating costs.

My verdict

Overall, ITM Power is struggling right now. Losses are forcing the ITM share price downwards. I believe in the long term, it could rise once more, but  right now, I would avoid the shares for my holdings. The immediate future looks bleak and the longer term future is also dependent on demand rising and the company’s ability to ward off intense competition. I will keep a keen eye on developments, however.

Jabran Khan 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