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As an investor, I wish to put money into firms with confirmed enterprise fashions. So it might appear that the FTSE 100 index makes a pure searching floor, because of its plethora of sizeable, well-established enterprises.
Even within the FTSE 100, although, there are some shares that do very effectively and others that carry out terribly.
Here’s a handful of issues I take note of when scouring the FTSE 100 for shares to purchase.
1. Concentrate on the long run
Corporations are elevated to the main index as a result of dimension of their market capitalisation. Not directly, that may make the index slightly backward-facing. Mature industries in decline can nonetheless be represented, whereas fast-growing sectors of the economic system may not be.
For example, contemplate tobacco.
Would possibly British American Tobacco and rival Imperial Manufacturers be remnants of a bygone period? Each noticed income declines final yr regardless of having robust pricing energy.
2. Sustainability of the enterprise mannequin
Nationwide Grid is a well-liked decide with earnings buyers, because of its beefy dividend and coverage of aiming to develop the dividend according to inflation.
But I don’t personal the share. Why? I feel the enterprise mannequin is much less profitable than it might appear. Sustaining it may require more cash.
Sure, energy distribution networks are seemingly right here for the long run. However sustaining or altering them may be very capital intensive. That helps clarify why Nationwide Grid diluted shareholders this yr to lift money.
3. Purchase the enterprise, not the hearsay
As nationally recognised firms, FTSE 100 companies usually pop up in takeover rumours. Shopping for a enterprise that then will get taken over can imply a fast revenue.
However I see that as hypothesis, not investing. I put money into a share solely as a result of I like its enterprise prospects and present valuation.
4. At all times take note of valuation
When shopping for any share, I feel valuation issues – and that applies to the FSTE 100 too.
Contemplate Spirax (LSE: SPX), the engineering firm that has an unbroken file of annual dividend per share will increase stretching again over half a century.
The enterprise efficiency has not been stellar currently. Whereas revenues hit an all-time excessive final yr, primary earnings per share fell 18%. With ongoing demand weak point in China, I see additional dangers for the steam and industrial fluid system specialist.
However I nonetheless see it as an important firm and would fortunately personal the shares. It has a large addressable market, proprietary expertise, a big put in buyer base, and powerful popularity.
However is that this FTSE 100 share, down 36% to date this yr, value over 20 instances earnings?
I don’t assume so, which is why I’m not shopping for.
5. Contemplate what units the agency aside
As with all share, I search for a aggressive benefit that I feel helps set a agency aside from rivals.
FTSE 100 companies like Haleon and Unilever have portfolios of distinctive manufacturers that give them pricing energy.
Billionaire investor Warren Buffett, who tried to purchase all of Unilever in 2017, at all times seems to be for a enterprise to have a “moat” that helps it fend off rivals.
