Shareholders in British American Tobacco (LSE: BATS) have become accustomed to the market beating the share price down. Last week brought two pieces of good news which saw the British American Tobacco share price jump. But, for reasons I explain below, I’d actually be happy if the share price were to fall again in coming months.

Solid performance

The first item of good news was British American Tobacco’s trading statement, issued last week.

I think this underlined a number of things I find attractive about the long-term investment case for the company. For example, revenue grew at over 5%, adjusting for currency fluctuations. Given the declining demand for cigarettes in many markets I see that as a strong performance. A lot of the growth is due to the growing success of the company’s so-called next generation products. The company has added another 3.6m consumers to its next generation brands over the past year.

One way to help combat declining cigarette volumes is by increasing prices. With its portfolio of premium brands like Lucky Strike, British American Tobacco has the necessary pricing power to do this. This also helped its performance, with the company pinning its strong US performance on cigarette pricing moves among other factors.

British American Tobacco’s large global footprint and strong cashflows help it pay out a sizeable dividend. It has increased the dividend every year so far this century. Continued strength in its business performance could help support such dividend growth in future. I do see a risk, though, that bigger next generation sales could hurt company profit margins. So far, such products have not proven to be as profitable as cigarettes.

US policy moves

The other piece of news which led to the British American Tobacco share price jumping last week was tax news from the company’s key US market.

There had been a proposal to tax e-cigarettes at the same rate as cigarettes. That plan didn’t come to fruition. Analysts reckoned that such a move could hurt demand for e-cigarettes, slowing revenue growth at British American Tobacco. So the climbdown was seen as positive for the shares, which moved up.

I see a risk that such a plan will come back in future, though. Cigarette companies are a cash cow for tax-hungry governments, not just investors. 

Is a growing BATS share price good news?

For many investors, share price growth in a company they own is seen as positive. As a British American Tobacco shareholder, though, I wasn’t thrilled by the company’s rally last week.

The main reason I like British American Tobacco is for its dividend income. Currently I have no plan to sell any BATS shares, but would happily buy more for my portfolio. A rising share price doesn’t affect the dividend — but it does mean that the yield falls relative to what was available before. Admittedly British American Tobacco still offers a 7.8% yield. That puts it among the ranks of the FTSE 100’s highest yielding shares.

But with a lower British American Tobacco share price, I could get an even higher yield. Even after last week’s jump, the shares are 5% below their level a year ago, at the time this was written today. I’ll be looking out for any price pullbacks in coming months to add more shares to my holdings.

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.

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Over the last five years, the FTSE 100 index hasn’t exactly been the best performer. In fact, excluding dividends, it’s generated a lacklustre return of around 3%. To be fair, the ongoing pandemic continues to wreak havoc on the UK economy. So it’s not exactly surprising that the index hasn’t fared too well.

Having said that, as the vaccine rollout continues and companies accelerate their recovery, the FTSE 100 has made a bit of a comeback. Over the past 12 months, its price has risen by over 11% and consequently, it’s on the verge of returning to pre-pandemic levels. But even if it can continue delivering these returns moving forward, I’ve spotted three individual growth stocks that I’d buy today instead.

The music industry is back with a vengeance

With the pandemic spreading worldwide, the music sector suffered a major blow as live events, and recording sessions had to be delayed or cancelled. But despite this inconvenience, Focusrite (LSE:TUNE) stormed ahead. The company is a designer and manufacturer of audio equipment and software.

Relatively speaking, this is quite a niche market with a lot of competition. And cancelled live events did disrupt its income from equipment sales and rentals. However, management was more than able to mitigate the impact through its home-studio products.

As such, revenue continued to surge by double-digits, and the stock has followed suit, beating the FTSE 100’s 12-month performance by 53%!

Improving consumer health with flavour

There continues to be increased awareness of general wellbeing, thanks in part to the pandemic. And that’s what brought Treatt (LSE:TET) onto my radar. This chemicals company uses organic materials to create flavours and fragrances for the beverage, consumer healthcare, and perfume industries. Most notably is its work to find sugar alternatives in the fight against obesity.

The group has suffered at the hands of Covid-19 as its supply chains have been challenged. It’s had to contend with inflationary pressures regarding the purchase of raw materials. However, management must have successfully passed these increased costs onto customers because profits are up.

Just like Focusrite, Treatt has also outperformed the FTSE 100 index over the past year, generating a return of 64% for shareholders.

Outperforming the FTSE 100 with electricity

With travel restrictions brought in to slow the spread of the virus, Tracsis (LSE:TRCS) also saw a slowdown in demand for its services, and its profits suffered considerably for it. So it’s not surprising that debt levels are significantly higher today than before the pandemic. But that soon might no longer be a problem.

This group provides a range of transport solution services, including using electrical signals to detect irregularities within railway lines. It’s also a niche target market. But maintaining Britain’s railways remains essential to the recovering domestic travel sector. And with the government planning to upgrade the UK rail network, Tracsis looks like it’s got plenty of growth opportunities ahead.

This is all my opinion, of course. But the market seems to agree. This stock has climbed 57% in the last 12 months, vastly outperforming the FTSE 100 index.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Focusrite, Tracsis, and Treatt. 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.

Rolls-Royce (LSE:RR) shares are one of the most popular stocks to own in the UK. In fact, some financial institutions seem to be very fond of it. As much as 30% of the business is held by only 10 of them, mostly involved with pensions. But while the professionals might be obsessed with this engineering giant, is this popularity warranted? And if not, then where should I be looking to invest?

A closer look at Rolls-Royce shares

Investors who bought Rolls-Royce shares a few years ago are likely looking at a red mark in their portfolio. That’s because, over the last five years, this stock has fallen by around 45%. Most of this decline was seen in early 2020 after the pandemic decimated its aerospace revenue stream. But even if I look at share price performance between December 2016 and 2019, it only climbed by a mediocre 4.6%. That doesn’t even beat inflation on an annualised basis. So, what happened?

For a long time, the financial state of this enterprise has been pretty dire. Only one out of the last five years have been profitable, which pushed management to take on considerable debt even before the pandemic reared its ugly head. Needless to say, that’s not the sign of a healthy and thriving business. And with Covid-19 only exacerbating the problem, I’m not surprised to see the stock take such a massive hit.

But recently, the situation has improved. The company is undergoing some fairly massive restructuring to cut costs. And its aerospace division is back on the mend as demand returns for its aircraft maintenance services. Therefore, Rolls-Royce shares may be primed to make a rapid comeback in 2022. And if that were to happen, then an investment as small as £1,000 could prove to be quite lucrative. But is there an even better buying opportunity elsewhere? I think there is.

Fallen from grace but capable of rising again

When investigating Rolls-Royce shares, many investors like to focus on its aerospace division. After all, it’s the group’s primary revenue source. However, it also has sizeable operations within the defence industry. That’s a sector in which Avon Protection (LSE:AVON) has recently fallen from grace as far as the market is concerned.

Avon designs and manufactures personal protective equipment for the armed forces as well as first-responders. And until recently, the stock was thriving, reaching as high as 4,650p in early December 2020. However, looking at the share price today, almost all the gains made in the last five years have been wiped out. There are undoubtedly numerous reasons why shares of Avon Protection have collapsed. However, one leading factor is a failed body armour test for the US Defence Logistics Agency, which significantly impacted growth expectations.

Yet the income from its flagship respirator and ballistic helmet product lines remains uncompromised, with double-digit growth still being delivered. That’s why I believe investors may have overreacted, creating a buying opportunity for my portfolio. And with a much stronger balance sheet than Rolls-Royce, these shares look like a better comeback story, in my opinion. As such, I’m not convinced buying Rolls-Royce would be so smart for me. I’d ignore Rolls-Royce and buy Avon for my portfolio.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Avon Protection. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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FTSE 100 company National Grid (LSE: NG) has a long record of paying steady dividends. And for me, that’s the main reason to buy some of the shares now.

But can the stock double my money? It’s possible. And here’s how it could happen.

Compounding dividend returns

With the share price near 1,046p, the dividend yield for the current trading year to March 2022 is around 4.8%.

To help explore the potential, I’m assuming the company will keep paying a dividend at the same rate for years ahead and the share price won’t move up or down. In reality, both those numbers will likely vary.

But I could buy the stock now and reinvest the stream of dividends with the aim of compounding my investment. And punching the numbers into a compound interest calculator reveals the investment would double after 15 years.

But the share price and dividend will almost certainly not remain as they are today. There’s an obvious risk that both could fall over time. And it’s even possible for the company to stop paying dividends altogether. After all, company directors have the power to do whatever they like with shareholder dividends.

However, there’s also an upside scenario I find attractive. Indeed, the share price and the dividend payment could both rise in the years ahead. And if that happens, the doubling time for my investment would shorten.

One of the factors making me optimistic is the firm’s long record of steady trading and finances. The business occupies a regulated monopoly position at the heart of the UK’s energy infrastructure with both electricity and gas operations. And it has regulated operations in the USA as well.

Borrowings versus dividends

To me, the energy sector is attractive because it tends to experience reliable and predictable demand. So it can be a straightforward process for the company and regulators to plan ahead. And, so far, regulators have not required National Grid to reinvest a crippling amount of money into its infrastructure networks.

However, regulatory risk is worth considering when holding the stock because conditions could change. And it’s possible ongoing shareholder dividend payments could be threatened if National Grid can’t afford them.

The company has to service debt interest and shareholder dividends. And the balance could become difficult to maintain if borrowings rise too far because of onerous regulatory demands.

However, National Grid and its regulators have the ability to raise prices to accommodate rising costs. So, on balance, I see the economics of the business as attractive. And the push for a low-carbon world economy could drive revenue growth in the years ahead. For example, the use of electric vehicles seems set to rise.

After some consideration, I think National Grid shapes up as a decent-looking stock to hold with the aim of doubling my money in the years ahead.

Kevin Godbold 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.

Recently there’s been good news from the owner of discount clothing chain Primark, Associated British Foods (LSE: ABF). The company announced at its annual general meeting last week that trading at the retailer so far this year has been ahead of expectations. What does that mean for ABF shares? Below I consider where the shares might go next and whether I ought to put them in my shopping basket.

Business is recovering at Primark

In the update, ABF said that like-for-like sales have improved compared to the fourth quarter of its last financial year. But the good news wasn’t limited to sales figures. At a time when supply chain disruption is troubling many retailers, the company said that it’s managing such disruption. And it has stock cover for the “vast majority” of its product lines for the Christmas trading period.

ABF also owns a number of well-known food businesses, as its name suggests. But over the past few years, Primark has become a key part of the investment case for the company. It now has 400 shops spread across a number of international markets. The fast fashion favourite had been the largest revenue contributor to ABF in the years leading up to the pandemic. That’s why Primark trade getting back on track is a critical element of the pandemic recovery story for ABF shares, in my opinion.

Attractive business but not cheap 

There was already a lot to like about the ABF business before Primark became quite so prominent. It owns a wide range of key brands such as Twinings, Allinson’s and Silver Spoon. That gives it pricing power. Some of the food sectors in which it operates, such as sugar refining and distribution, have fairly high barriers to entry due to their capital expenditure requirements. That can help support ABF profit margins.

Primark added something very different to the company’s business model. The clothing chain’s business cycle isn’t connected to that of food. In principle that adds to the company’s diversification. But as we saw last year, it can also mean that ABF shares suffer overall when Primark underperforms, even if the food divisions are doing fine. That risk remains. For example, further lockdowns affecting Primark could eat into revenues and profits for the whole company. In fact, lockdowns could hurt Primark more than many competitors because its operations are based only on physical shops, not online channels.

Overall though, I continue to find the investment case for ABF attractive. It has proved that it’s well run, with an efficient business operation. But with a price-to-earnings ratio over 30, I think that’s already reflected in the price of ABF shares.

Should I buy ABF shares now?

Despite its attractive business model and improving performance at the Primark division, I don’t plan on adding ABF shares to my portfolio at the moment. Over the past 12 months, they’ve lost 15% as I write. I think that underlines City nervousness about how deep-rooted the company’s recovery may turn out to be.

Not only is the Primark recovery subject to key markets remaining open, there are risks in the food business too. Ingredients price inflation could hurt profit margins in the foods business if the company can’t pass higher prices on to customers, for example.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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When a stock is heavily shorted, it’s a very bearish sign. It means that a large number of investors are betting on the stock’s price falling in the future. In the case of Cineworld, the most recent data showed that it has a short interest of 9.5%. This makes the cinema operator the most shorted stock in the UK. So, does this mean that the Cineworld share price is set to decline further, or after its 27% yearly decline, can it recover?

Risks of Omicron

The Omicron variant has put the company’s future into doubt, and over the past month, the Cineworld share price has declined 30%. This is mainly due to fears that demand could be hit. At worst, there’s also the prospect of another lockdown, which could hit the company hard. But is this large share price decline warranted?

The ideal situation for the company is that demand can continue recovering, despite the risks posed by Omicron. This would continue the trend seen over the past few months, with cinema bookings hitting their highest level of growth since October 2019. It even managed to generate positive cash flow in October, and group revenues were 90% of 2019 levels. If similar momentum can continue, I feel the Cineworld share price could soar.

But this is a big ‘if’. Indeed, restrictions have already been announced in response to the new variant, and this includes compulsory wearing of masks in cinemas. This may lessen the appeal of cinemas, and lead to people staying at home once again.

Further, if there’s a new lockdown, the results could be disastrous. This is especially true considering the company’s extreme levels of debt. In fact, in this scenario, insolvency wouldn’t be out of the question. This risk is the reason why the shares have dropped so much recently.

The debt situation

Even before the pandemic, Cineworld’s debt position seemed pretty unsustainable. Yet at least it was profitable then. But operating losses in the first half of the year totalled over $200m. And debt has also continued to soar. In fact, net debt currently totals $4.6bn, far greater than its current market capitalisation of around $700m. As such, even if it’s forced to issue more shares to pay off some of this debt, this is unlikely to make much of a dent in the total. There are also several forthcoming interest payments, and if the company can’t return to profitability, default is a possibility. This could result in insolvency and even see the Cineworld share price fall to zero.

Has the Cineworld share got further downside?

In the case of another lockdown, I believe that the Cineworld share price will fall a lot further. This is one reason why I think it’s so heavily shorted.

But there’s also the chance for the shares to soar. Indeed, before Omicron, the recovery was progressing well. If this recovery can continue despite the emergence of the new variant, I believe the upside potential could be huge. There could even be a short squeeze. I’m not going to buy though, until I can see more evidence that a new lockdown isn’t coming. This is because the risks seem too great right now. 

Stuart Blair 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.

Last Friday’s US inflation figures show that prices have risen faster than at any time in the last 40 years. November inflation figures for the UK are also out soon. If previous trends are anything to go by, prices are likely to be sharply higher. As the same picture emerges around the world, I’m looking at a dividend-paying ETF as a hedge against rising prices.

Looking for protection

I believe that high-dividend-paying shares can be protection against inflation. These companies tend to be steady firms in solid sectors. In an inflationary environment, they could even be able to increase the prices of their goods or services and maintain or increase their dividends more than the rate of inflation.

For my own portfolio, I’ve always liked ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost.

One I’m considering

SPDR S&P Global Dividend Aristocrats UCITS ETF (LSE: GBDV) is one fund that’s always on my radar. Its aim is to invest in global high-dividend-yielding companies by following the S&P Global Dividend Aristocrats Quality Income Index. This tracks companies that have over a $1bn market capitalisation and that have sustained or elevated dividends for at least 10 consecutive years. At the same time, the firms must maintain a positive return on equity and cash flows from operations. Such companies should have pricing power in an inflationary environment.

Diversification is always on my mind when investing and this ETF scores well in terms of number of firms, geographical location and industries.

First, there are around 100 companies in this fund. No company has more than a 3% weighting within the ETF. Second, the fund is geographically diverse. US companies make up 45%, but the remaining firms come from all across the world. Finally, it covers a wide variety of industries including banking, utilities and insurance.    

This ETF is large at over $700m and has a reasonable ongoing charge. The dividend yield is currently around 3.7%, which is acceptable given the diversity of the ETF. 

The outlook

It’s worth me remembering that there are some risks. One that comes to mind is the dividend trap. This is where a dividend isn’t sustainable in the long run because the underlying business isn’t good. I’m also aware there are other alternatives that might provide more protection in the face of inflation, such as gold.

As I see it, demand for oil and gas is pushing up energy bills around the world. Shortages of many goods, because of factory shutdowns due to covid restrictions, are pushing up prices. The rise of the omicron Covid variant is likely to exacerbate things.

On balance, given that inflation is likely to continue to soar next year, I’m seriously contemplating adding this high dividend-paying ETF to my portfolio.

Niki Jerath does not own shares in SPDR S&P Global Dividend Aristocrats UCITS ETF. 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.