‘Tis the season for reflecting on the past year and looking ahead to the coming one.
Over in the US, the S&P 500 index is up over 25%, as I’m writing. It’s printed multiple record highs through 2021 led by heavyweight tech stocks. Apple has recently been flirting with becoming the world’s first three-trillion-dollar company. Talk about the goose is getting fat!
Here in the UK, the performance of the FTSE 100 hasn’t been quite as spectacular. But our blue-chip index is just about hanging on to a double-digit gain at the moment. Mind, it remains some way below its pre-pandemic levels.
And like Jacob Marley, Mr Footsie goes into the new year bearing a weighty chain. One forged by the recent appearance of the Omicron virus variant, surging inflation, and last week’s decision by the Bank of England to hike interest rates to 0.25%.
Let’s have a look at the outlook for some of the UK’s popular blue-chip stocks.
Shell and BP
The FTSE 100 oil giants have made strong gains this year — Shell (+31%) and BP (+37%) — although the shares of both (and the oil price) are currently off their highs. There are some fears the surge in Covid cases could slow, if not derail, the oil-price recovery seen in 2021.
Still, the recent weakness in Shell and BP’s shares has pushed their forecast 2022 dividend yields up to 4.6% and 5.1% respectively. They look like attractive income stocks to my eye, and have potential for capital gains if the oil-price recovery resumes next year.
The resurgence of Covid has loomed even larger over the recent performance of the shares of airlines and engine-maker Rolls-Royce. At one point, the latter’s shares were up 33% since the start of the year. They’re now up just 3%.
On the positive side, while there’ll be no dividend for the foreseeable future, a free cash flow (FCF) target of at least £750m — possibly in 2022 but probably 2023 — gives an attractive FCF yield of over 8%. The company has a good bit of work to do if it’s to reach this target, but it’s a credible long-term recovery stock, in my view.
AstraZeneca and GlaxoSmithKline
Like the oil giants, the Footsie’s big pharma groups AstraZeneca (+19%) and GlaxoSmithKline (+26%) have performed well in 2021. They don’t sport as generous forward yields as their oil counterparts — 2.6% and 3.4% respectively — but their businesses are less sensitive to the macro-economic environment.
AstraZeneca completed its $39bn takeover of Alexion Pharmaceuticals in the third quarter of 2021. It’s not unknown for such mega-deals to give the acquirer a bout of indigestion, and I’ll be watching how the integration progresses in the coming months.
GlaxoSmithKline is heading the opposite way in 2022, planning to break itself up with a demerger of its consumer healthcare business. Former Tesco boss Dave Lewis has just been appointed chair designate for this business and it looks a good move to me. I’ve long felt a break-up of GSK would unlock value for shareholders and continue to do so.
Takeover speculation has surrounded BT through 2021 and it’s shares are up 27% since the start of the year. A recent rumour of interest from India’s Reliance Industries and news that billionaire Patrick Drahi has increased his stake in BT from 12% to 18% have provided the latest fuel for speculation.
The company reinstated its dividend at the half-year stage and the forward yield is a very decent 4.6%. Dividends, debt obligations and investment for growth will be something of a balancing act. But, like Rolls-Royce, I see BT as a credible long-term recovery stock. A value-unlocking bid for the company — or part of it — can’t be ruled out either.
Lloyds has been another market outperformer in 2021. Its shares are up 30% at the moment. They responded positively to the recent Bank of England interest-rate hike, as higher rates generally make for higher profits on banks’ lending activities.
However, if rate increases were to cut off economic growth in 2022, lower income and higher debts could cast a pall over Lloyds’ performance. On balance though, I see a forecast dividend yield of 5.5% as sufficient to make the stock an attractive one for me to consider as an income-seeker.
As I’m all set to ensconce myself in a comfy chair by the fire, it only remains for me to wish one and all a happy, healthy and prosperous 2022. Keep it Foolish!
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G A Chester doesn’t own any shares mentioned in this article. The Motley Fool UK has recommended Apple, GlaxoSmithKline, Lloyds Banking Group, and Tesco.