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The FTSE 100 was down yesterday for the fourth straight trading day. Unfortunately for the pest control company Rentokil Initial  (LSE: RTO), it was front and centre of this decline. In fact, yesterday’s 12.3% decline represented the single worst trading day this company has seen in 13 years. The reason? Rentokil announced that it will be buying American rival, Terminix. So far, it’s not so much the acquisition that seems to have caused concern but rather the price tag on the deal that’s really bugging investors (pun intended). Reuters reported yesterday that Rentokil would pay $6.7bn (or £5.1bn) on the deal. That amounts to about $55 per share or a 47% premium compared to Terminix’s closing price on Monday. The irony is that while Rentokil stock is reeling, Terminix shares are up 18% since the news broke on Monday.

The underlying business

Rentokil has a solid underlying business model in its own right. It was already the world’s largest company in this industry. Nearly two-thirds of its revenues last year came from pest control and it has entrenched itself as the global leader in the industry. Since 2016 the company has acquired 228 companies, expanding its presence to 82 countries. From a financial perspective, what jumps out to me is that revenues that have been consistently growing over the past few years. This is backed by very chunky gross profits that are consistently either over or close to 80%. The bottom line could use a bit of a boost but with revenues growing by 14.5% in the last quarter, I’m confident in the ability of this company to continue to grow and drive up net earnings. There’s simply no FTSE 100 comparison due to the niche and scale on which this company operates.

A creepy-crawly killing FSTE conglomerate

I think that, while a 47% premium is undoubtedly quite hefty, what the market is failing to price in is all the advantages of this merger. With $2bn in revenue last year, a presence in 47 US states and a reputation as the second-largest company in the US pest control market, Terminix is a premium company. To get premium companies, you often have to pay a premium price. This deal will entrench Rentokil as the global leader. This unfettered access to the US market is coming at a time when the $22bn global pest control industry is growing rapidly. The onset of the pandemic, as well as a growing middle-class population, means that demand will continue to grow.

Last month Rentokil stated that labour shortages and Covid-19 related medical bills are driving up costs so this must be factored in. Russ Mould, investment director at AJ Bell, also noted that the deal could attract the attention of antitrust regulators in the US, which could present challenges for the company going forward. So, while I don’t think it will be smooth sailing, I think that this is a safe pick for my portfolio with loads of potential upside. Currently trading at 40 times earnings, it’s not the cheapest FTSE 100 stock right now but definitely one that I will be keeping on my radar.

Stephen Bhasera 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.

The latest reading on economic growth is muted. And the Covid-19 situation is looking challenging again. It does not look quite as challenging as it was last year, but keeping both facts in mind, we need to brace ourselves for a slower recovery than we might have expected earlier. Based on this, I am re-adjusting my expectations downwards for recovery stocks. There are some, though, that I still believe could have a fair bit of upside to them. One of them is the penny stock Photo-Me International (LSE: PHTM).

Penny stock on the rise

The company’s main business is running photo-booths for pictures required for official purposes like passports and other ID cards. It also provides laundry services, kiosks for digital printing, and vending equipment for food. The penny stock faced its financial challenges in recent times, but seems to be finding its way out of the hole now. For the six months ending April 2021, it managed to clock net profits after one year of losses. And its latest trading update is positive too.  

Its trading activity was strong in the last quarter of its financial year ended 31 October 2021. Based on this, it expects revenue to be slightly higher than forecast earlier. It also expects pre-tax profits to be in the upper end of its estimates. It is little wonder then, that its share price rallied 11% when the update was released, reaching the highest level in a month. 

Unavoidable risks for 2022

This is encouraging. But there are risks too. In its outlook, the company mentions macroeconomic challenges like inflation arising from supply chain issues. Inflation is a challenge that is clearly here to stay in the next year, going by forecasts. So I think as a potential investor, it is a good idea to brace for a probable hit to its profits from it. Though, if economic activity were to reduce substantially because of another wave of the pandemic, I think inflation could ease off too. It has its own negative impact though, by directly impacting demand. 

What I’d do

So what would I do about the Photo-Me international stock? I think for now, I would wait and see how the Omicron variant situation plays out. For now, things are too uncertain to make a call on recovery stocks. Also, even before the pandemic, the penny stock was not going anywhere. If anything, over the past few years, its stock price has been broadly declining. Moreover, its earnings ratio is a significant 40 times right now. If anything, this says to me that the stock’s price could come off further, especially if the broader markets weaken. 

As such, it looks too risky for me to buy the stock for 2022. I would much rather focus on more dependable options now that could give me solid returns over the next few years. 

Manika Premsingh 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.

I reckon buying dividend shares can be a good way to set up regular passive income streams. It also doesn’t need to be expensive. Here’s how I would plan to start by using £10 a week.

Why I’d pick dividend shares

By buying dividend shares, I can benefit from the success of large companies without having to do any of the work. So I can put my money to work, hopefully earning me more, without needing to spend any time working.

Growth shares may increase in price, but often they don’t pay out dividends. So I may need to wait years until I sell them to get any capital appreciation in the form of hard cash. By contrast, dividend shares often make payouts annually, biannually, or even quarterly. So I should be able to benefit from such dividends within a few months of starting to invest.

That said, just like growth is never guaranteed, neither are dividends.

Is £10 a week enough?

If I could put in more than £10 a week, I would. That would help me increase my passive income streams faster. But I do think even £10 a week could set up meaningful passive income streams. It equates to over £500 a year. That is certainly enough for me to buy shares. Importantly, it allows me to reduce my risk by diversifying between different shares and industries.  

On top of that, what some people forget is that if I buy shares today, I can keep getting any dividends they pay for as long as I hold them. So let’s say that this year, I invest £520 in shares yielding 5% on average. That will hopefully earn me £26 a year in dividends. But next year, I would still receive any dividends paid by those shares. So I could get £26 of dividends next year – on top of any more dividends on the new shares I purchase.

That means, after a decade of putting aside £520 a year at a yield of 5%, I’d be earning £260 a year in passive income. In reality, if dividends had grown during the decade, I might actually get a higher amount. On top of that, I would benefit from any capital appreciation due to share price rises. There is a risk, though, that my capital could fall if share prices did.

Choosing shares for passive income

How could I decide which shares to buy?

With relatively modest amounts at stake to begin, I’d focus on trying to preserve my capital. So I wouldn’t invest in small or very speculative companies. Instead, I would put my money in large, well-established companies with a proven business model.

I’d zoom in on “free cash flow”. That is how much excess cash a company throws off each year. In the long term, that is what helps fund dividends.

That would lead me to looking at companies such as Legal & General, British American Tobacco, and National Grid. They yield around the 5% average yield I used in my example above. Only National Grid is below 5%, at 4.6%.

Then I’d choose the shares which best fit my investment objectives and risk tolerance. What’s right for a different investor might not suit me, after all.

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.

It is not very often that I come across stocks that tick almost all boxes. Like this one does. It is a penny stock, which means that I can buy a bigger share of a hopefully growing company than would be otherwise possible. And it is indeed growing. This is apparent from the fact that its stock price is up by 115% in the past year alone! Moreover, it is also dirt-cheap in relative terms. Its price-to-earnings (P/E) ratio is a really low 4.9 times. 

Vertu Motors’ gains ground

The stock I’m talking about is the AIM-listed Vertu Motors (LSE: VTU), the UK-wide franchised dealer for all kinds of vehicles. Besides the fact that its stock price performance is promising, there is a lot going for it from the perspective of fundamentals as well. The company’s recent trading update released last week, is robust. It has upgraded its pre-tax profit expectations for the year ending 28 February 2022. The number is now expected to be no less than £70m. The company had earlier believed that the figure would be £65m.

It is also expanding. Earlier this week, it said that it is acquiring two Toyota dealerships for £9.2m. The transaction will be funded through its own cash. And it is expected to add to Vertu Motors’ earnings from its next financial year onwards. I have to admit that I scoured for the sources of funding for the acquisitions before reading other details. This is because the present times are uncertain. And they have been so particularly for the travel industry, and that includes Vertu Motors. Taking on debt at this time might be risky, in my view! So, it is good that the company is funding it from its own resources. 

Challenges for the AIM-listed stock

As always, though, there are challenges to watch out for. In its trading update, for instance, Vertu mentions that it “remains cautious on the future outlook with the potential of further disruption from Covid-19 to our resource levels, consumer confidence and global supply chains”. As far as Covid-19 is concerned, we are indeed seeing disruptions now. Scotland has already imposed some restrictions, and I am seeing increasing news flow on a probable lockdown in England soon, as well. We do not know if it will happen or not. What we do know is that such news could be bad for the penny stock. 

Would I buy the penny stock?

So would I buy the stock now? Absolutely. I think the odds are still in favour of the stock. I reckon that even if things go south in terms of Covid-19, they would probably not be as bad as what we have seen in the past. And even during that time, Vertu Motors was able to sustain some profit, even though its earnings took a hit. I think that is noteworthy. I would buy the stock. 

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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 want my holdings to make me a passive income, so I am on the lookout for dividend stocks. One pick that can help me do that is PRS The REIT (LSE:PRSR).

Passive income seekers heaven

Investors often look at buy to let opportunities to access the property market. A real estate investment trust (REIT) is a company that owns and operates income-producing real estate. One of the main rules a REIT must follow is that 90% of its tax-exempt property income profit must be distributed to investors as dividends.

PRS is the UK’s first quoted REIT to focus on newly built family homes for the private rental market. It aims to enhance the rental experience for consumers and provide them with new, quality homes. As I write, PRS shares are trading for 106p, whereas a year ago shares were trading for 75p. This is a 41% return over a 12-month period.

Why I like PRS

I like PRS first because the current housing and house building market is booming. The demand for new houses is outstripping supply and housebuilders are working as hard as possible to build them. Buyers are on the lookout for new homes to buy and live in, but due to rising costs, most turn to renting. PRS can benefit from both of these favourable market conditions. It builds its own houses and then manages renting them to consumers.

I like the idea of building up a buy to let portfolio as an investment vehicle but this can be costly and time consuming. A REIT like PRS can help me make a passive income without thousands of pounds of outlay and time spent managing tenants and properties. In addition to this, buying a REIT means I avoid double taxation compared to a regular dividend stock. Other firms are liable for corporation tax and my dividend received would be taxable too. If I had a buy to let, my rental income would be liable for tax as well. REITs receive a corporate tax exemption for rental income. This means the net rental income can pass through to me, the investor, as a dividend.

Finally, PRS continues its upward growth trajectory. This was signified by an announcement confirming the purchase of a new site for a new project today. Furthermore, PRS looks cheap at current levels. It has a price-to-earnings ratio of just over 11 and a dividend yield close to 5%.

Risks involved

Current macroeconomic pressures such as rising inflation and rising costs of materials will impact house builders. A REIT like PRS could be affected as it builds its own properties. These costs, if not passed to the customers, could affect performance and any passive income I am looking to make. Also, the shares are trading close to all-time highs, meaning any negative news could knock investor sentiment and pose a risk to returns.

Overall, I believe PRS is an excellent opportunity for me to access the property market, and let somebody else manage the hassle of the properties involved. At current levels, it is cheap and has an enticing dividend yield. I would add the shares to my holdings now to make a passive income.

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.

This morning we got the latest inflation figure for November. At 5.1%, it’s the highest figure in over a decade and one that I need to pay attention to. Why? The value of my spare cash is being eroded due to this rising price level. One way I can look to beat inflation is via investing in FTSE 100 dividend stocks, with yields above 5.1%. Here are two that I like at the moment.

A steady dividend payer

The first dividend stock I like is Legal & General (LSE:LGEN). The share currently offers a dividend yield of 6.17%, with the share price having risen 16% over the past year. 

The company focuses on investment management along with retirement products such as annuities and pensions. I would say this is a fairly low risk business model.  Once you’ve reached scale and have a reasonable amount of assets under management, fees and commissions keep ticking over.

In the H1 results, operating profit was up 14% from the same period last year. More importantly, this growth was seen across different business areas. This allowed the earnings per share to increase by 21%, with some of the overall earnings distributed as dividends.

Looking forward, not only can the dividend yield help me to beat inflation, but I think it’s a sustainable stock for the future. The company has a robust dividend policy and has paid out some form of income for the last decade.

As a risk, I could be hit with a double whammy if we see a stock market crash. Not only could the share take a hit, but the funds managed by Legal & General could also fall. This could compound the share price slump of this dividend stock.

A mining stock to consider

The second dividend stock I’m thinking about buying is Anglo American (LSE:AAL). It offers me a similar yield to LGEN, at 6.34%. Over the past year, the share price has risen by an impressive 20%. 

There were concerns earlier this year regarding the company, with regards to the iron ore mined. With concerns around a slowdown in China (a huge iron ore consumer due to steel production), iron ore demand fell. Although prices have rebounded back above $100/T in recent weeks, this remains the big risk I see for the stock in 2022.

Aside from this risk, I think the company can perform well in other areas. For example, copper. The Quellaveco copper project in Peru is expected to be a big focus for the business. I should also note, in contrast to iron ore, the copper price is up around 18% over the past year. 

I’m aware that this is a more volatile dividend stock than others, but it does have a generous yield that’ll allow me to beat inflation at current levels. I can accept that I’ll be taking on some added risk.

Overall, I’m considering buying both dividend stocks now to act as a way to counterbalance high UK inflation.

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.

These might not be the best times for many companies, what with the pandemic dragging on, but some are certainly going from strength to strength. One of them is the AIM-listed UK stock K3 Capital (LSE: K3C), which has shown an impressive increase in its financials over the years. 

What does K3 capital do

The company provides advisory services to small and medium-sized enterprises under three heads. The first of these is mergers and acquisitions, which includes services like company sales and corporate finance services. The next is tax advisory, which includes all kinds of services related to taxation including tax credit claims and tax investigations-related works. And then there is its restructuring advisory, which provides insolvency and restructuring-related advice, analysis of business performance, and forensic accounting services. 

Growth across segments for the UK stock

In its recent trading update, K3 Capital said that all business divisions have performed well in the six months ending 30 November 2021. It now expects that revenue for this half-year to have almost doubled from the year before. An increase in profits is also expected. As per CEO John Rigby, the board “is confident in the prospects of the Group for the remainder of FY22 and beyond”. 

The company expects growth through both the organic route as well as through acquisitions. In fact, the past six months’ performance reflects two recent acquisitions that took place in July 2021. Clearly, the company is doing a whole lot right, considering that between 2018 and 2021, its revenues have increased by three times. 

Downside to the AIM stock

Its share price has also risen by a healthy 46% in the past year. However, not all is hunky-dory. Its over the years, its share price has fluctuated a fair bit. And its price-to-earnings (P/E) ratio is also pretty steep at 46 times. I guess this is partly because it has performed quite well recently. Still, considering the uncertain times we are living in, I do think that this is a very high for a relatively small firm. It has a market capitalisation of £275m, which is certainly not among the smallest, but it is a far cry from big FTSE 100 companies. And this industry segment could suffer if the recovery continues to be muted because of the Omicron variant. 

What I’d do now

Keeping this in mind, I will not buy the AIM stock right away. I will wait for the whole Covid-19 situation to play out over the next month or so. This will give me a better assessment of how things might look for it in 2022. If they do continue looking bright, I would very much like to invest £1,000 in the stock next year. If they falter, however, I will keep it on my investing watchlist, and buy the UK stock when the time looks right. In the meantime, I will focus on more predictable stocks. 

Manika Premsingh 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.

Jaw-dropping inflation reports have become the norm all over the world. Strained supply chains, rising labour costs, and rocketing energy prices are forcing consumers to pay more and more for their goods and services. It looks like prices are on course to continue soaring in 2022 too.

The Consumer Prices Index (CPI) rose by 5.1% in the 12 months to November, the Office for National Statistics said today. That’s up significantly from the 4.2% growth seen a month earlier and represents a fresh 10-year high.

It seems that the Bank of England will resist hiking interest rates to combat the problem, too, as the emergence of Omicron batters the British economy, giving the inflationary boom extra stamina. The smart money remains on rates remaining at record lows of 0.1% when the rate-setting committee sits on Thursday.

Why I’m investing in my Stocks and Shares ISA

UK shares are a riskier place to park your cash than in something like a bog-standard savings account. Stock prices can go down as well as up, of course, whereas the rate of return you’ll get from something like a Cash ISA is fixed.

Still, the prospect of receiving paltry returns from a savings account means, aside from my emergency savings, I’ll continue to primarily invest in my Stocks and Shares ISA. Studies show that the average long-term investor receives an average annual return of 8%. Compare that with the sub-1% interest rates that cash savers have been receiving in recent years.

Indeed, moneysupermarket.com says the best-paying Cash ISA on the market from Paragon Bank offers a rate of just 0.65%. With inflation now at 5%, the value of any money held in one of these products is dwindling rapidly.

3 FTSE 100 shares I think could thrive

This is why I plan to continue buying UK shares for my Stocks and Shares ISA. That’s even though the inflation boom threatens the economic recovery, and rising Covid-19 infection rates and problems in China’s real estate sector pose additional risks.

There are plenty of stocks on the FTSE 100 alone that I believe could thrive in 2022. Unilever is one of these blue chips I expect to perform strongly as the immense pricing power of brands like Dove soap and Magnum ice cream should allow it to pass rising costs onto its customers efficiently. I think it’ll thrive despite the problem of rising competition among local product manufacturers.

I actually reckon B&M European Value Retail could benefit from rising inflation. Demand for its low-cost goods could well balloon as shoppers try to stretch their shopping budgets that little bit further. I’d buy it even though its lack of an online operation could see it lose out to retailers with an internet presence.

And finally, although consumer concerns over the environmental impact of fast fashion is rising, the same rush for value could also boost sales at Associated British Foods’ budget fashion division Primark. I also think this FTSE 100 share will have a solid 2022 because of its ultra-defensive food ingredients business.

Royston Wild owns Unilever. The Motley Fool UK has recommended Associated British Foods, B&M European Value, Moneysupermarket.com, 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.

The UK’s Consumer Prices Index (CPI) inflation number for the 12 months to November was revealed this morning to be 5.1%. This is a 10-year high, meaning the value of my cash in the bank is dwindling. To combat this, I am on the lookout for dividend stocks for my portfolio with a yield that beats 5.1%! Imperial Brands (LSE:IMB) is one such stock.

Inflation rising

November’s 5.1% CPI number was greater than October’s 4.2%. Expectations were for it to be 4.7%, so the news this morning came as a surprise, but not a good one. Experts did not expect inflation to head above the 5% figure until next spring!

ONS chief economist Grant Fitzner said, “A wide range of price rises contributed to another steep rise in inflation”. These rising costs are pushing up the cost of living. This includes essentials such as food, clothing, and fuel. The costs of goods produced by factories and the price of raw materials are also surging. These factors are also likely to put more pressure on consumer prices in the coming months.

Looking for dividend stocks

A way I am looking to beat inflation is by looking for the best dividend stocks. A dividend yield is calculated by reviewing the annual dividend per share paid out, compared to the share price when I purchase the shares. This provides me with a percentage yield.

With my spare cash sitting in my bank and its value dwindling, I could use it to buy dividend stocks that provide a yield higher than 5%.

There are a couple of risks to consider, however. As mentioned, new inflation figures are revealed each month. Current uncertainty and rising levels means it could well go up again in the coming months. So for example, if the stock I target has a dividend yield of 5.5%, and new figures revealed next month were to surpass that level, the yield would not exceed the new level of inflation.

Furthermore, dividends are not guaranteed and are intrinsically linked to the well-being and performance of a company. They can be cancelled or cut. If either of these risks come to fruition, the value of my investment would be negative.

Dividend stock with a 9% yield!

Imperial Brands currently has a dividend yield close to 9%! Smoking firms don’t always have the best reputation among investors, especially in recent times but as a smoker myself, this doesn’t bother me.

At current levels, the shares are trading for 1,566p compared to a year ago when they were trading for 1,575p. Imperial sports a price-to-earnings ratio of just 6 which I consider cheap for a large, well-established company with a long track record of performance and dividends. I understand past performance is not a guarantee of the future but I use it as a gauge.

Imperial’s recent full-year results were promising and showed it is adapting to changing market conditions and sentiments towards smoking. Revenue, profit, and dividend per share increased. It has decided to cut costs and streamline where possible. Furthermore, it is pulling out of under-performing markets as well as looking at innovative “next generation” products.

I would happily add Imperial shares to my holding at current levels as a dividend stock to beat inflation levels.

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