Vodafone (LSE: VOD), British American Tobacco (LSE: BATS), and Diageo (LSE: DGE) are popular FTSE 100 shares. Yet right now, all three are trading close to their 52-week lows.
Is this a great time to buy these dividend-paying Footsie stocks? Let’s discuss.
The truth about those lows
Let me start by saying that I would never buy a stock just because it’s close to its 52-week lows.
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If a stock is near that point, it’s in a downtrend. And these can be dangerous for investors (they can last a lot longer than one anticipates).
Ultimately, one needs to be very careful when dealing with stocks that are trending down. Ideally, there needs to be some kind of catalyst that could reverse the trend.
Vodafone
As for Vodafone shares, I can’t say they interest me at current levels.
This is a company that is struggling to generate growth right now. It also has a huge pile of debt on its balance sheet.
Sure, there is a high dividend yield here at the moment. But the yield is so high (9.6%) that it suggests to me the market is anticipating a dividend cut.
Now, the company does have a new CEO, Margherita Della Valle. And she has vowed to cut thousands of jobs in an effort to turn things around.
“My priorities are customers, simplicity and growth. We will simplify our organisation, cutting out complexity to regain our competitiveness,” said the CEO recently.
However, she has a tough task ahead of her. I’m not expecting a major turnaround any time soon.
British American Tobacco
What about British American Tobacco stock? Well, this one does look really cheap right now. Currently, it has a forward-looking P/E ratio of around seven.
And the company is expected to generate some top-line growth in the years ahead.
However, like Vodafone, it has a massive pile of debt on its balance sheet. At the end of 2022, net debt stood at £38bn. This is a turn-off for me.
It’s worth noting that one thing that could help it is weakness in the technology sector. Last year, when tech stocks crashed, tobacco shares surged.
I’d rather back tech stocks, however. In today’s world – in which digital transformation and sustainability are major themes – I think they are likely to be better investments than tobacco companies.
Diageo
Johnnie Walker owner Diageo is one stock near 52-week lows that I would buy now though.
This is a high-quality company. Not only does it have significant long-term growth potential (it should benefit from rising wealth in emerging markets over the long run) but it’s also very profitable.
One thing that could provide some support for share price here is share buybacks. Earlier this year, Diageo said that it would buy back an additional £0.5bn worth of stock. Buybacks tend to increase earnings per share.
Another is lower inflation. This could lead to lower costs for things like ingredients, packaging, and transportation, boosting earnings per share.
There’s no guarantee that the Diageo share price will find support in the near term, of course. It could keep falling.
However, with the P/E ratio under 20 right now, I like the risk/reward skew. I plan to add to my holding here in the next few weeks.
