2023 has had its fair share of challenges already. Turmoil in some parts of the banking sector and persistently high levels of inflation have kept investors on their toes this quarter.
While there’s still scope for potential rate rises in the near term, there’s a growing body of opinion that stable or even falling rates are in sight. If this proves to be the case, it’s likely to be positive for sentiment towards shares.
With that in mind, here’s an update on how our five shares to watch fared in the first quarter of 2023 and what could be next.
This article isn’t personal advice. Investments and any income from them can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, seek advice. Past performance isn’t a guide to future returns.
Investing in individual companies isn’t right for everyone. Our five shares to watch are for people who understand the increased risks of investing in individual shares. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.
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Pick the shares you want to hear about
BAE Systems
We expected to see a strong performance in BAE's full-year results, and the announcement at the end of February didn't disappoint. Thanks to growth across all divisions, full-year revenue rose 9.1% to £21.3bn. Amid escalating global tensions, the group's started to capture extra spending from increasing defence budgets.
Underlying operating profits rose too, up from £2.2bn to £2.5bn – ahead of analyst consensus. And continued strong free cash flows meant that despite increased dividends and share buybacks, the net debt position improved too.
There's also room for BAE to funnel some cash into strategic acquisitions in key growth areas to accelerate growth.
Dividends vs share buybacks – what investors need to know
Throughout 2023, we expect BAE to remain relatively resilient to inflationary pressures. Contracts typically enjoy a pricing structure whereby the group can pass on most of the rising input costs to the end consumer. This should help keep margins robust as we move through the year, and underpins the group's expectations of growing underlying operating profits in the 4-6% range.
We think BAE is well positioned to benefit from higher defence spending over the coming years, with its diverse geographical footprint being another weapon in its arsenal. But the market has taken note, with the group trading above its long-term average on a forward price-to-earnings basis.
A member of the share research team holds shares in BAE Systems.
BAE SYSTEMS SHARE PRICE, CHARTS AND RESEARCH
British American Tobacco
Despite a continuing fall in cigarette sales, BATS' 2022 full-year results managed to eek out revenue growth of 2.3% to £26.3bn, before the effects of exchange rate movements.
Within that, sales from new categories like vapes, rose by 37.0% to £2.8bn. Underlying operating profit was up by 4.3% to £12.4bn. This was at the top end of guidance, boosted by cost savings in excess of those originally targeted.
While free cash flow increased by 8.1% to £8bn, net debt was also up by 8.2% to £39.3bn, due in large part to foreign exchange movements. This might well have been the driving force in the board's decision not to extend the share buyback program, which disappointed the market.
The dividend was however raised 6% to 230.9p. The shares now offer a prospective yield of over 8%, but as ever there are no guarantees and yields are variable.
BATS enjoyed top line growth in all markets, except the US where combustible volumes were down by 15.5%. Despite this, it’s been able to push up prices, launch new products and grow margins in what is by far its largest market.
However, with US smokers starting to focus on value, profit growth could become more challenging in 2023. For 2023, BATS expects organic revenue growth of 3-5%, despite a forecasted 2% volume decline for the tobacco industry.
BATS is betting big on its reduced risk products to transform the group. And it's encouraging to hear that New Categories are on track to reach profitability in 2024, one year ahead of plan.
But while that part of the business is still loss-making, we continue to urge caution over the growth outlook, and see the yield as the core focus for investors.
BRITISH AMERICAN TOBACCO SHARE PRICE, CHARTS AND RESEARCH
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Bunzl
Bunzl's 2022 financial year results were strong. Price hikes and acquisitions did their jobs to keep inflation at bay, and margins crept higher. The result was an 11.1% jump in underlying operating profit to £885.9m and the 30th consecutive year of dividend growth.
Last year's performance helped continue the impressive long-term track record. Revenue and underlying operating profit have grown at an annualised rate of 9% since 2004.
We expect cost pressures to continue into 2023, and further price rises will likely follow. Whether margins can hold on remains to be seen. But a benefit of selling essential products and being deeply integrated into customers' supply chains is a degree of stickiness that supports pricing power.
Acquisitions are still a vital part of the growth story, with the group bringing on 12 new businesses over 2022 for a total cost of £322m. We've already had news of a few acquisitions in the new year in Germany and Canada – both expand existing operations in the regions.
We still see Bunzl's track record of doing well during tough times and steady growth as attractive qualities as economic uncertainty lingers. That hasn't gone unnoticed though, with the group continuing to trade on a valuation ahead of the wider sector.
BUNZL SHARE PRICE, CHARTS AND RESEARCH
Paypal
Paypal released results for the final quarter of 2022 in February, and as previously guided, revenues of $7.4bn were up 9% compared to the same period 12 months before.
The trend of margin recovery has continued as Paypal took a knife to expenses not related to the processing of customer payments. This allowed underlying operating profits to increase by 12% to $1.7bn, faster than the pace of revenue growth.
Paypal is expecting to maintain a 9% revenue growth rate in the first quarter of 2023, with an operating margin in the region of 22%. For the full year it's looking for underlying earnings per share to grow by 18%, up from previous guidance of 15%.
News also emerged that Dan Schulman, CEO, is set to step down at the end of 2023. Having overseen a period of stellar growth, there are big shoes to fill. And until a successor has their feet under the table, investor sentiment towards the shares will likely be somewhat dampened.
As a leading provider of digital wallets, we see further opportunities for Paypal to grow its market share and expand its product offering over the longer term. But in the short term, total payment volumes will remain the key driver of Paypal's fortunes.
A fragile outlook for the global economy means there could be some bumps in the road ahead. This is reflected in the valuation which is well below the long-term average. Ultimately, we think the company's robust balance sheet and impressive cash generation levels leave it well placed to handle ups and downs.
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PAYPAL SHARE PRICE, CHARTS AND RESEARCH
Volvo
Volvo's reported its fourth quarter results in February and we think the group's investment case remains on track.
Over the long term, Volvo’s formidable truck business remains crucial for global logistics and other specialist equipment, like engines used in construction. Over the final quarter of last year, there was growth in all areas, including a 30% rise in Truck sales to SEK87.3bn. So far this year, the group’s valuation has seen a 6.5% uplift.
While we think the long-term case looks unchanged from what we outlined at the end of 2022, there are some lingering challenges which could cause some moves.
Inflation is one of them. Volvo is being affected by increasing costs, which caused it to miss profit expectations. At the same time, the group's taking a cautious approach to accepting new orders. Locking prices in now for work not yet started can be a costly mistake when inflation's running high.
Volvo is handling these pressures in the right way. But it's a fast-moving situation which the market could punish if Volvo gets its sums wrong.
The important final piece of the puzzle is the group's dividend. A prospective yield of 5.3% is a core attraction of the stock.
So far, the group's pay-out ratio remains low, which means it pays out a relatively small proportion of its earnings as dividends. That means the payments are less sensitive to wobbles in earnings. It also means the dividends have more room to grow than a company already stretching itself thin.
Remember though, no dividend is ever guaranteed and yields are variable. Overseas dividends can be subject to withholding tax which might not be reclaimable.
Volvo Group's shares now change hands for 11.4 times expected earnings, some way below the ten-year average.
VOLVO GROUP SHARE PRICE, CHARTS AND RESEARCH
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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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