I’ve been looking at two UK stocks recently that I think are great businesses. Both trade at reasonable prices, have sound balance sheets, and pay decent dividends.
Only one makes it onto my list of stocks to buy now, though. The other is just too risky for me as someone looking to invest for the long term.
Buy: Forterra
With a 5.86% dividend yield, I see Forterra (LSE:FORT) as one of the best UK stocks to buy now. The stock is down by almost 31% since the beginning of January, but I’d be happy to buy it at today’s prices.
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The company’s main product is bricks. Not an obviously exciting industry, but I think the company has some features that make the stock a good investment for the long term.
I’m not sure whether I think that bricks are a commodity or not. But either way, I think Forterra has a strong business with a competitive advantage – what Warren Buffett calls an ‘economic moat’.
According to the company’s website, Forterra has the lowest cost of production among brick manufacturers. If bricks are a commodity, then this means that the business has what I see as the main advantage.
On the other hand, if bricks aren’t a commodity, then Forterra has a different kind of advantage. The company also has some important brands, including London Brick, which features in over 25% of the UK’s housing stock.
Buying a brick company with interest rates rising and share prices falling could be risky. But with the UK housing stock at a structural shortage, I’m expecting the company to do well over time.
Avoid: Hargreaves Lansdown
I’m staying well away from Hargreaves Lansdown (LSE:HL). The share price has fallen by around 39% since the start of the year, pushing the dividend yield up to 4.7%, but I’ve no interest in the stock even at today’s prices.
On paper, this looks like a high quality business. It generates huge returns on its fixed assets, has more cash than debt, and distributes a lot of its operating income to its shareholders.
So what’s the problem? Unlike Forterra, I don’t think that Hargreaves Lansdown has much of an economic moat.
The company makes its money by charging small fees to its customers. These include annual account charges, dealing charges, and automated sales charges.
Increasingly, though, investing platforms that don’t have these charges are starting to appear. And they’re cutting into HL’s business.
As a result, earnings per share have been declining since 2020 and are now lower than they were in 2018. On top of this, the company’s revenues in 2022 were down by around 7.5% compared to 2021.
I think that Hargreaves Lansdown’s business has a number of attractive features. But without something to protect itself from competitors, it’s not a stock that I’m interested in buying.
Economic moats
Both Forterra and Hargreaves Lansdown look like good businesses to me. But only one looks like a good investment.
The main difference between the two companies is that one has an economic moat and the other doesn’t. That’s why I’d buy the former and avoid the latter.
