I think 2021’s market recovery from pandemic lows allowed many investors to buy some excellent stocks on the way back up. Also, it gave me an opportunity to study the recovery potential of UK shares, which is a primary marker for my market analysis.
However, some FTSE 100 gems underperformed this year. Economic instability affected certain sectors more than others. And I think there is potential for these stocks to stage a comeback in 2022, if concerns abate. With this data in hand, I think BAE Systems (LSE: BA) and Legal & General (LSE: LGEN) are the two UK shares that are fundamentally very stable and have the potential to bolster my portfolio in the coming months.
British defence giant
BAE shares rose 13.3% in the last 12 months. In comparison, the FTSE 100 index was up 14% in the same period. This is surprising when I look at its half-year (H1) 2021 report. BAE is on track to grow sales by 3%-5% in 2021. Its current order book is estimated at £44.6bn, and analysts expect the company to hit targets next year, barring any deal collapses. The company is also on track to maintain the three-year cash flow target of £4bn by 2023.
BAE’s above-average dividend yield of 4.3% is a big plus. Also, a new share buyback programme of up to £500m over the next 12 months is already underway.
But, the defence firm operates in a closely monitored sector that is tied to government regulations. Trade deals could fall through if the UK government flags a new deal. Also, export tariffs and restrictions could add to costs. The fluctuating pound to US dollar exchange rates could also affect its sizeable export revenue.
BAE shares, at their current price of 568p, are trading at a forward profit-to-earnings (P/E) ratio of 10.3 times. This shows me room for growth considering projected revenue, cash flow, and yield. This is why I think this UK share is a great buy for my portfolio before 2022.
Dividend stock with room for growth
LGEN is an FTSE 100 stalwart that underperformed this year, recording a meek 13.8% returns in 12 months. But it is a tested business with strong financials and here’s why I think that it is a good long-term pick for my portfolio.
At its current share price of 295p, LGEN is trading at a forward P/E ratio of 7.7 times, which seems low considering its large market share in a competitive sector. In fact, it has been an underwhelming year for a lot of major insurers in the UK. And this is understandable considering the economic concerns following 2020.
LGEN had a strong start to 2021. Operating profits grew 14% in H1 2021 to £1.07bn. The asset management division of the company grew well last year with a total of £1.3trn of assets under its wing. LGEN is on target to hit estimated revenue growth next year as well. The insurer also offers an impressive 6% dividend yield. The company recently updated its cumulative dividend policy, aiming for a £5.6bn-£5.9bn payout by 2024. Its 2020 dividend payout was £1.04bn.
Competition from other big UK insurers like Aviva and M&G is a concern. And if we see a market crash in 2022, financial institutions will take a hit. Also, rising claim costs in the UK, especially for vehicle insurance could cut into profits next year. But LGEN remains my top UK dividend share for 2022 given its yield and consumer base.
Suraj Radhakrishnan 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.
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