Key Points

• Positive forecasts for oil and other commodities should help the best stocks within the sector to outperform
• Generous dividend yields could provide income potential
• The high correlation between commodity prices and the share price is a risk

Over the past month, commodity stocks have been performing well. For example, the Anglo American share price is up 17% in the past month, with Rio Tinto also up almost 15%. Stronger commodity prices have helped to spur this move on as we’ve started the new year. Yet when I look further down the line, I think that these type of companies could be some of the best stocks for me to buy now for potential further gains.

A positive outlook 

Firstly, the outlook for many core commodities looks much better than it did last year. For example, Rio Tinto mines a good amount of iron ore. This is consumed in a large part by China, as a component of steel production. Iron ore prices fell through the floor late last summer with concerns about demand from China. This appears to have been just a scare, with iron ore prices now bouncing back. I think that China is still in a good position going forward, so I think iron ore prices can keep pushing higher.

Oil is another example of a commodity showing strength. The West Texas Intermediate crude benchmark oil price has jumped from $70 per barrel a month ago to trade at $82 currently. This has helped shares of companies like BP and Glencore move higher by double-digits in the past month. If the world economy sees more travel during 2022, then oil should continue to be in demand for refined outputs such as fuel. As a result, it should make these some of the best stocks to buy now.

Income potential from top stocks

A second reason to like commodity stocks is due to the generous dividend yields. When I look at the current yields on offer, most sit well above the FTSE 100 average of 3.32%. In fact, four of the top 10 highest yield stocks are mining companies. This includes Rio Tinto with a current yield of 9.17%.

This yield is one reason why I might want to consider buying now versus later on. One element of the dividend yield calculation is the share price. If the dividend per share stays constant, a higher share price reduces the dividend yield. Therefore, if I think that these companies will do well this year, I’m better off buying now instead of waiting for a few months. 

Risks to consider

It isn’t all good news for commodity stocks. Over a longer one-year period, some of the companies are still in the red. For example, Polymetal International shares are down 29% over this time frame. Therefore, it’s important for me to be selective about which companies I judge to be the best stocks to buy now.

Another risk is that there’s a high correlation between share price movements and commodity prices. So even if the company does everything well internally, it still might see profits decline simply due to lower commodity prices.

Jon Smith and The Motley Fool UK have 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.

I have been thinking about what passive income ideas I can use in 2022 and beyond. One source of unearned income I like is investing in dividend shares. I can sit back and hopefully watch the dividends pile up. With a modest sum to invest, I would only expect a fairly low amount of income in return. But that is better than nothing – for doing almost nothing.

British American Tobacco

Many investors shun tobacco stocks for ethical reasons. But as someone willing to buy them, I think such stocks can offer attractive returns.

A case in point is London-based giant British American Tobacco (LSE: BATS). The company owns brands such as Lucky Strikes and operates worldwide. Its portfolio of premium brands gives it pricing power. That can help sustain profit margins in a time of high inflation.

One risk to the company is declining rates of cigarette smoking in many markets. That could bring revenues and profits down in the long term. BATS has been developing alternative revenue streams, for example building its line of next generation products in areas such as vaping. That could help to replace disappearing cigarette sales, although for now at least the profit margins are lower.

Despite the challenges, BATS continues to be highly cash generative. It pays four dividends a year, and has raised the payout annually for over two decades. At the moment the shares yield 7.3%. That means if I invested £250 in BATS shares today, I would hopefully receive just over £18 of passive income in the coming year alone.

M&G

My second choice would be asset manager M&G (LSE: MNG).

The company specialises in investment management. I like that as a business area because it can be very lucrative. The large sums involved mean that even a modest commission for the company can be a sizeable amount of money in absolute terms. M&G’s established brand name and reputation are a competitive advantage which can help it win new clients.

The company is committed to maintaining or increasing its dividend, although like all dividends there is no guarantee in practice that that will happen. Currently, the shares yield 8.6%. So if I invested £250 into M&G shares today, I would hopefully receive a little over £21 in passive income across the following 12 months.

There are risks with a company like M&G. For example, turbulence in stock markets can affect investment returns. That may lead to clients placing their business elsewhere, reducing M&G’s revenue and profit.

Putting my passive income ideas into action

The thing about passive income ideas is that they will not generate any money at all if they remain only as ideas. To start making money, they need to be put into action.

I already own British American Tobacco shares and am happily receiving regular passive income from them. I would gladly invest another £250 in BATS shares today. I would also consider buying M&G for my portfolio to further boost my income streams, even if only in a modest way to begin with.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.

When it comes to buying shares for the first time, it can be hard to know where to start. There are thousands of companies listed on stock exchanges around the world. Were I to start investing today, I would do so by setting up my portfolio and buying a couple of UK shares. Below I explain why I would take this approach.

Setting up my portfolio

When I say setting up a portfolio, I simply mean a vehicle through which I can buy, hold or sell shares. To do that, I also need some sort of share-dealing account. One popular type is a Stocks and Shares ISA.

Doing that would give me the ability to trade shares. I would also need to put some money in to buy shares. If it was my first time investing, I would be tempted to start on a small scale. That would limit my upside potential if the shares did well. But more importantly, it would also reduce my risk. As a new investor it can be easy to make simple mistakes when evaluating shares. Learning from missteps could help me become a better investor in future – but I would prefer any mistakes to be relatively cheap, not expensive ones. Over time, as I felt more confident in selecting shares for my portfolio, I could increase the money I invested.

Buying the market

One of the first shares I would buy to start investing would be an index tracker fund, such as the Vanguard FTSE 100 index Unit Trust. Such funds invest in a basket of shares that broadly represent a leading index, in this case the FTSE 100. That would offer me diversification, even when buying a single stock. Effectively I would be buying tiny slivers of all the companies in the FTSE 100 index, through the fund.

I also think I could learn more about shares by getting to grips with the dynamics of the FTSE 100. For example, why does the index not necessarily go up when there is a rally in tech shares? Why is the FTSE 100 dividend yield notably lower than the yield from some individual shares? Why do the FTSE 100 and FTSE 350 indices not move in lockstep? The more I focused on the FTSE 100, the more I think I could learn about shares in general. That would be a good foundation for my later investments.

I would start investing in a supermarket

So where else would I invest? A supermarket is a good places to buy most things. While Tesco does not sell shares on its shelves, I would be tempted to add Tesco shares to my portfolio.

Why would I go for this supermarket chain as the second share in my portfolio?  The reason is that it is a stalwart of the UK economy. The company is the largest supermarket in the UK and has a growing online operation. That exposes it to risks, such as online competition hurting profit margins. But it also means that the firm is something of a proxy for the UK economy overall. Whereas some retailers see a dramatic drop in demand when the economy stumbles, a grocery chain like Tesco makes a lot of its revenue selling essential food and household items. That means its earnings ability is fairly robust.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

HSBC (LSE:HSBA) shares have rallied in 2022 to date. With that in mind, is the current HSBC share price tempting enough for me to add the shares to my holdings? Let’s take a closer look at what’s happening.

HSBC share price rally

As I write, shares in HSBC are trading for 505p. In 2022 to date, the shares have increased by 12% from 448p to current levels. Although still some way off the 580p pre-market crash price back in February 2020, I feel the price could edge up back towards this pre-crash level in the months ahead.

The HSBC shares’ mini rally in the first two weeks of 2022 doesn’t really offer me an insight toward the longer term outlook. I want to delve deeper into the HSBC share price and consider whether I should buy the shares or not. 

For and against investing

FOR: Shares that are close to or below a price-to-earnings ratio of 10 are generally considered a bargain. At current levels, HSBC shares have a P/E ratio of 11, just over the benchmark and most likely due to the recent rally. HSBC shares look cheap as one of the world’s biggest banks with exposure to many markets throughout the world.

AGAINST: Financial stocks like HSBC are often considered cyclical and closely linked to the world economy. Right now, the world economy looks vulnerable and any recovery post-pandemic is on a knife edge and could go either way. One of my biggest red flags when looking to add shares to my holdings is uncertainty linked to external factors that a firm cannot control.

FOR: HSBC’s most recent trading update, a Q3 update released in October last year, gave me a snapshot at the future outlook, which is favourable. The update would have boosted the HSBC share price. HSBC said revenue expectations are improving and earnings per share levels (EPS) should surpass pre-pandemic levels. Dividend payments should be reinstated with a potential dividend yield of over 4% for the current year of 2022. I am also excited by potential further dividend growth expected in 2023 which is enticing. HSBC had a favourable dividend track record before the market crash and banking-wide dividend payment suspension came into place. I understand forecasts don’t always come to fruition, however.

AGAINST: HSBC’s huge exposure to the Asia-Pacific market is an area of concern for me personally right now. China’s real estate sector is in crisis and HSBC’s exposure to this could derail performance and investment viability too. Many large real estate developers in China are struggling to repay loans. There is a belief that this could lead to economic chaos in one of the world’s largest economies. This would be bad for HSBC and the HSBC share price in my opinion.

My verdict

HSBC shares look cheap at current levels. With the outlook ahead for performance growth and more importantly dividends to return to pre-pandemic levels, I see value in the HSBC share price. For this reason I would be willing to add HSBC shares to my portfolio at current levels.

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

I believe two UK shares could double my money in 2022 if I added them to my holdings. Both of these stocks are well known house builders. Let’s take a closer look at them.

Macroeconomic outlook

The demand for homes is set to outstrip supply for many years to come. House builders are working around the clock to build new homes and they have no problem selling them. Furthermore, current house prices are high and showing no signs of stagnating or dropping just yet. The good news here is that barriers for purchasing homes have never been lower for buyers. Although interest rates have risen, they are still low enough to give many buyers access to good mortgage rates. In addition, there are plenty of government backed Help to Buy loans to assist first time buyers.

UK share #1

My first pick is Persimmon Homes (LSE:PSN). As I write, the shares are trading for 2,573p. This is a 3% drop from this time last year when the shares were trading for 2,650p. The shares have dropped this week as the UK government announced house builders and developers should fix the cladding crisis. All house builders and property firms listed have seen shares drop due to this.

Persimmon still stands out as a potentially lucrative UK share for me to add to my portfolio. Today’s trading update signified the strength of Persimmon’s recent performance as well as future prospects too. The update covered brief final year results for the year ended 31 December 2021 before full results are published in March. The number of houses completed, average selling price, group revenue, net cash, and dividend per share all increased compared to 2020 levels. I believe 2022 could be an even better year. 

Persimmon shares are not risk-free, however. The recent supply chain crisis as well as rising costs of material and HGV driver shortages could impact operations and performance. In addition to this, the house building market is saturated and competition is intense too.

Overall, I believe Persimmon could double my money in 2022 and I would add the shares to my holdings. The market outlook is favourable and to add a nice cherry on top, Persimmon has a dividend yield of almost 9%! At current levels it looks cheap too with a price-to-earnings (PE) ratio of just 11.

Pick #2

My second pick is Bellway Homes (LSE:BWY). As I write, the shares are trading for 2993p, which is a 2% increase from this time last year. Bellway’s shares have also dropped slightly this week after the cladding announcement.

I believe Bellway is one of the UK shares from the house builders out there to have benefitted the most from recent favourable conditions. Bellway released full-year results for the period ending 31 July back in October. Profit increased by over 100% and revenue increased by over 40%. I am also buoyed by the fact that insiders are buying shares.

Bellway also has risks and these are all very similar to those that Persimmon faces, noted above. Rising costs, supply chain issues, and HGV driver shortages could affect performance in 2022.

Overall Bellway is another UK share I would add to my holdings to attempt to double my money in 2022. It has a dividend yield of just under 4% and looks cheap with a P/E ratio of just over 9.

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.

Some of my best stocks to buy now can make me a passive income through dividend payments. One pick I like right now is GlaxoSmithKline (LSE:GSK). Here’s why I would add the shares to my holdings to make a passive income.

Pharma giant

GSK is one of the biggest pharmaceutical firms in the world, headquartered in the UK. It discovers, develops, manufactures, and sells medicines, vaccines, and general consumer healthcare products all around the world.

As I write, GSK shares are trading for 1,636p per share. At this time last year, shares were trading for 1,372p which is a 17% return over a 12-month period. The shares actually dipped in the summer last year to as low as 1,380p. I believe this was due to the announcement that GSK would be spinning off its consumer healthcare business. There was also to be a cut in dividends by GSK from 80p per share to 55p per share. This new GSK would offer a dividend of 45p per share from 2023.

Why GSK is one of my best stocks to buy now

Despite the drop in GSK’s share price, I was always optimistic the share price would rise back up and dividends would remain above the market average. The share price has increased steadily and the dividend yield stands at over 5%. The FTSE 100 average is 3%-4%.

There are other stocks that offer a higher yield but GSK is a quality business in my eyes and a large player in its market. Pharma is a large saturated market but there are only a handful of names that resonate with most people throughout the world. GSK is one of them. In addition to this, GSK is taking the necessary steps to reduce its carbon footprint towards net zero in 2030 and reduce costs. This can potentially lead to better performance and more investor returns.

One of the primary characteristics I look for in my best stocks to buy now is consistency of performance. GSK’s most recent update for Q3 2021 was revealed in November last year. Performance across all divisions saw gains as well as an increase in a healthy cash balance. Furthermore, the cost cutting has already begun too. GSK also has a positive track record of performance as well. I understand past performance is not a guarantee of the future, however. I can see revenue has increased year on year for the past four years. Profit increased for three years prior to the pandemic-affected 2020.

Risks involved

Despite my bullish stance, GSK shares do have risks. Firstly, dividends are not guaranteed and can be cancelled by a business anytime. Next, the division of the business into two could be costly and a distraction for management. This could result in performance dropping off and reduced payouts for investors in the form of dividends. In addition to this, pharma is a very competitive sector. All the big pharma firms are vying for market share and the next big drug or vaccine. GSK could be adversely affected by its competitors.

Overall I think GSK could make me an excellent passive income and it is also one of my best stocks to buy now. This is because it is a quality business with a great profile and offering as well as the fact the shares currently look like good value to me.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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 Argo Blockchain share price has increased by 1,260% over the past two years
• The trajectory of this stock is strongly correlated with the underlying performance of cryptocurrencies
• Revenue has grown massively in 2021

Many cryptocurrencies, including Bitcoin, have seen significant buying throughout 2020 and 2021. One way to gain exposure to these assets is by investing in crypto-mining stocks. Argo Blockchain (LSE: ARB) listed in August 2018 and has several facilities actively mining cryptocurrencies. This stock has enjoyed staggering growth over the past two years. If I had invested £1,000 in January 2019, what would my holding now be worth? Let’s take a closer look.

Heart-stopping share price growth

In January 2019, Argo Blockchain was still a new addition to the London Stock Exchange. Having IPO’d the previous August, its share price stood around the 6.9p mark. Fast-forward two years and the share price is now around 90p. The two years in between saw price action nearly topping the £3 level. In the space of two years, the increase in the share price is somewhere in the region of 1,260%.

Essentially, this means that if I’d invested £1,000 two years ago, it would now be worth £12,600! This is phenomenal growth by any standards. Of course, much has changed in this time. The pandemic gave rise to massive gains in the price of cryptocurrencies. Argo Blockchain’s price is closely, though not entirely, related to the price of cryptocurrencies. It should be noted, therefore, that the share price can endure massive fluctuations as the prices of cryptocurrencies rise and fall. Although the share price over two years increased 1,260%, over the course of one year the Argo Blockchain share price has declined 18.7%. This shows that gains may not be sustained annually, owing to the volatile nature of cryptocurrencies.

Where next?

In its interim report for the six months to 30 June 2021, Argo Blockchain posted encouraging results. Revenue had increased 180% to £31.1m, up from £11.1m for the same period in 2020. Furthermore, there was over 20 times growth in pre-tax profit to £10.7m. Another metric used in this industry to gauge progress is the number of Bitcoin mined per month. This number has increased 222% from December 2020 to December 2021, reflecting Argo Blockchain’s better mining capacity. Over the six months to December 2021, however, mining actually decreased 4.8%.  

Argo Blockchain has also been raising funds to cover its Texas expansion and the cost of new mining machinery. The Q1 2021 update stated the company had received £49.2m from two different fundraisings. A listing in the US on the NASDAQ exchange in September 2021 will further strengthen the company’s financial position. The lack of long-term results currently makes Argo Blockchain difficult to value, but reference to sector competitors may provide some context. With a price-to-earnings (P/E) ratio of 41.59, Argo Blockchain sits between two competitors in the US. Riot Blockchain and Hive Blockchain have P/E ratios of 98.28 and 9.04 respectively. 

It is undeniable that Argo Blockchain has registered fantastic growth over the past two years. As we have seen, however, the yearly share price performance is not as encouraging. Nonetheless, as long as cryptocurrencies remain strong, Argo Blockchain should continue to perform well. I will most certainly be buying up shares for my own portfolio.

Andrew Woods does not have a 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.

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Dividend stocks are among several options available to individuals interested in building a passive income. Personally, the thought of seeing money appear in my account despite doing no work is quite alluring. But how do stocks help me achieve this? And what are the risks to be aware of. Let’s explore.

Generating passive income with dividend stocks

What can often be forgotten is that when an investor buys shares, they’ve just bought a piece of a company. So, if I were to buy some stock in a business like Lloyds, it’s not incorrect for me to say I part-own Britain’s largest bank. And the same applies to any public company.

As fun as the bragging rights might be, they’re not the interesting part of the transaction. As an owner, I have a claim on the profits of the companies I invest in. How these profits are distributed is up to the leadership team. But a common method, especially among more mature businesses, is dividends.

Dividends are essentially payments issued to shareholders (the owners). The amount received is determined by the dividend amount times the number of shares owned. So, the more shares I buy, the bigger my dividend cheque will be.

The money used to pay dividends is usually taken from the spare capital that a business has and doesn’t need for ongoing operations or future projects. The amount paid is declared a couple of months ahead of the actual payment date. And dividing the dividends paid per share by the share price, I get the dividend yield. In simple terms, the bigger the yield, the more money I get.

Nothing is risk-free

As exciting as the prospect of getting ‘free’ money from dividend stocks may be, there are some issues to be aware of. Firstly, dividend payments are entirely optional for a company. That means they could disappear at any time with relatively short notice.

Don’t forget dividends are paid to shareholders from the excess capital of a business. If the company runs into financial turmoil, as many did in 2020, these payments often get cut or even outright cancelled. Even Lloyds, despite being a multi-billion pound business, suspended dividend payments when the pandemic broke out.

Something else to be wary of is a very large dividend yield. Don’t forget this figure is a function of the share price. As such, if a stock suddenly drops, the yield goes up. And when a stock falls drastically, it typically means something is very wrong, with a dividend cut possibly on the horizon. That’s why double-digit yields are often a red flag for many income investors.

Crunching the numbers

Over the last five years, the FTSE 100 has generated a dividend yield of around 3%-4%. But by being selective in the stocks I buy, targeting an annual yield of 5% without being exposed to lots of risk is achievable, in my opinion.

To generate £500 a month at a 5% yield, I would need to invest £120,000 in the stock market. That’s quite a big chunk of capital. However, if I were to build up this lump sum over time by investing £1,000 a month, it becomes far more obtainable. And thanks to compounding effects, it could theoretically only take eight years if I started from nothing.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Historically, buying shares of Lloyds (LSE:LLOY) hasn’t exactly been a lucrative move for investors. Over the last five years, the stock price has fallen by nearly 20%. And while dividends have helped offset the losses, the returns remain mediocre.

But over the last 12 months, the Lloyds share price has been rising. In fact, it’s up by over 45%! So, what’s behind this momentum? Will it continue in 2022? And is this an investment opportunity that I can’t miss? Let’s explore.

What happened in 2020?

Being the UK’s largest bank, Lloyds is a pretty complex organisation with a lot of moving parts. But the basic business model behind any commercial bank is to accept deposits, issue loans, and profit from interest payments. That final part helps explain why Lloyds shares have performed so poorly in recent years. Interest rates have been exceptionally low for over a decade following the 2008 financial crisis.

In 2020, further cuts to interest rates by the Bank of England made it even more challenging for Lloyds to profit from its lending business. Coupled with a surge of loan impairments courtesy of the pandemic, the bank’s statutory profit fell from £3bn in 2019 to £1.4bn in 2020 – a 53% drop!

That’s obviously not a great sign. So why are the shares climbing at the moment?

The momentum behind Lloyds shares

2021 was a year of significant economic recovery in the UK. As such, Lloyds has begun making new loans at a lower risk of default, and delayed payments from 2020 have started flowing in. Consequently, when management released its third-quarter trading update, pre-tax profits for the first nine months of 2021 came in at a staggering £5.1bn. That’s about 16% higher than for the whole of 2019.

So, seeing the Lloyds share price move in upwards last year is hardly surprising to me. But can it continue throughout 2022?

Time to invest?

Upon closer inspection, the explosive rise in profits can largely be attributed to a significant reduction in impairments rather than issuing new loans. That’s because net interest income actually fell by 1% compared to a year ago, according to the third-quarter trading update. Does this mean the boost in profits is a one-time gain? Not necessarily.

I think expecting triple-digit profit growth in 2022 is too optimistic. However, thanks to the Bank of England raising interest rates to tackle inflation, Lloyd’s interest income is set to grow significantly from this tailwind.

Needless to say, if profits continue to climb in 2022, then the Lloyds share price will likely follow suit. Yet this is far from guaranteed. The pandemic is still with us, and many businesses are still struggling. As infection rates are hovering near all-time highs at the moment, speculations of another lockdown persists. In the worst-case scenario, that could quickly interrupt the current momentum of Lloyds shares.

Personally, I feel this is a risk worth taking. I do believe adding this bank to my portfolio could be a smart move to grow my wealth in 2022.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

As we enter 2022, many UK shares that have been decimated by the pandemic are slowly getting back on their feet. But not every recovery story could have a happy ending. With that in mind, I’ve spotted two once-prominent FTSE 250 companies that I think will struggle to return to their former glory in 2022. Let’s explore.

Is this UK share a ticking-time-bomb?

There seems to be a lot of hope being held out for Cineworld (LSE:CINE). The UK cinema chain saw its shares collapse in 2020 after the pandemic forced everyone to stay at home. But since then, the situation has improved. Cinemas have reopened. And with a lot of pent-up demand from consumers, along with a long line-up of delayed blockbusters, the resurrection of its revenue stream seems to be progressing well.

That certainly sounds like an exciting recovery story on the surface. But after exploring deeper, I remain sceptical about the long-term prospects of this business. Primarily because of its debt.

Cineworld’s pile of loan obligations has always been substantial, thanks to its acquisitive growth strategy over the years. Unfortunately, this may have sealed the group’s fate. Without any meaningful cash flow to cover interest expenses at the height of the pandemic, management was forced to take out new loans while renegotiating covenants on existing ones.

Consequently, it now has around $8.8bn (£6.4bn) of debt to repay. And with interest rates on the rise, along with a massive $970m (£705m) legal bill to cover after pulling out of the Cineplex acquisition in 2020, even if the company can return to pre-pandemic sales levels, it likely won’t be sufficient to cover its obligations to creditors.

With the covenants and waivers renegotiation lever already pulled, I think a financial restructuring could be on the cards. This means lenders would agree to write off a chunk of debt in exchange for new equity. But historically, when this happens, existing shareholders can be left with close to worthless shares. As such, the potential gains from a recovery doesn’t match the risk in my mind. That’s why I’m steering clear of this UK share.

The travel sector limps on

Carnival (LSE:CCL) is another company thrashed by Covid-19. This cruise line suspended most of its operations in the early days of the pandemic to protect its customers. The travel restrictions that followed for months after only increased the pressure, and management also relied on debt financing to stay afloat.

Skip forward to today, and the group has over $33.2bn (£24.2bn) of debt on its balance sheet. Just like Cineworld, rising interest rates could be disastrous for profit margins. That’s obviously bad news for the shares of this UK stock. But the situation may not be as bleak as it seems.

Unlike Cineworld, Carnival has amassed over $9.1bn (£6.6bn) in cash that can easily cover its short-term obligations. Meanwhile, assuming that new travel restrictions are not introduced in 2022, management expects its entire fleet of cruise ships to return to operations by June.

I must admit this is an encouraging sign. However, I think there are far better and less leveraged investment opportunities for my portfolio. Therefore, I won’t be buying these UK shares today either.

Zaven Boyrazian 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.