Five shares to watch

in 2023
We look at five shares investors could consider in 2023
SHARE RESEARCH
TEAM
We’re in uncertain times. It’s more
important than ever to make sure you
hold a diversified pot of assets – meaning
you’re not overly exposed to one type of
investment. For investors who can accept
and manage the extra risk, that can
include looking to individual shares.
There are certain companies we think
have better long-term potential than
others in their sector or that are better
placed to stand firm in the ongoing weak
economic environment.
Please remember investing in individual
shares isn’t right for everyone. That's
because it's higher risk, your investment
depends on the fate of that company. If
that company fails, you risk losing your
whole investment. If you cannot afford to
lose your investment, investing in a single
company might not be right for you. You
should make sure you understand the
companies you're investing in and their
specific risks.
Make sure any new investment forms
part of a diversified portfolio.
This isn’t personal advice or a
recommendation to buy, sell, or hold any
investment. Share prices can go down as
well as up and there’s always a risk you
could get back less than you invest. If
you’re not sure what to do, please
seek advice.

IMPORTANT NOTES:
This factsheet is not personal advice or a recommendation to buy, sell or hold any investment. If investors are not sure of the suitability of an
investment for their circumstances, they should seek advice. No view is given on the present or future value or price of any investment, and investors
should form their own view on any proposed investment. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst
forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past
performance is not a guide to the future and investments rise and fall in value so investors could make a loss.

This has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a
marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in
place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see
our full non-independent research disclosure for more information. Information correct as at 1 December 2022 unless otherwise stated.

This publication is issued by Hargreaves Lansdown Asset Management Ltd, One College Square South, Anchor Road, Bristol
BS1 5HL who is authorised and regulated by the Financial Conduct Authority.

2
BAE SYSTEMS
Critical supplier in today’s world

BAE Systems manufactures, services US and UK governments, which adds

and sells military tools and equipment, a level of reliability. The group’s order
like fighter jets, aircraft carriers, and backlog stood at £52.7bn as at the half
increasingly Cyber & Intelligence tools. It year mark. That gives the group visibility
has annual sales of around £21.3bn, and over demand others can only dream of.
underlying operating profit of £2.2bn. It also underpins the prospective yield of
3.9%. No dividend is ever guaranteed.
BAE’s enormous scale and specialised
products mean there aren’t too many
competitors. Its main customers are the

BAE DIVIDEND PER SHARE ESTIMATED

35 GBp

30 GBp

25 GBp

20 GBp

15 GBp

10 GBp

5 GBp

0 GBp
FY Dec-02

FY Dec-03

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FY Dec-24

Source: Refinitiv Eikon 14/11/22

3
Today’s geopolitical climate means
threat levels have increased. We think
governments are less likely to rein in
defence spending. It also means other
countries are likely to move to bolster
their own fleets and systems, which is
a potential benefit for BAE.
There are some risks that come from
investing in a defence company. Some
institutional investors exclude investments
in the sector, which can cap returns. At
the same time, defence companies like
BAE are at a higher risk of controversial
events than others. There would be
downward pressure on the valuation
if something like this were to occur. A
broader risk is that government defence
budgets tend to wax and wane, and we
expect BAE’s order intakes to broadly
follow these trends.
BAE SHARE PRICE,
CHARTS AND HOW TO DEAL
Cash flow has historically been a thorn in
BAE's side. Working capital management
coupled with strong profits means this is
the second year running that cashflow is
in the black.
The group’s order
Costs are facing pressure from supply
backlog stood at
chain disruption, but for now BAE says
it's offsetting the worst of the
£52.7bn as at the
financial impact.
half year mark.
As a critical defence supplier in today’s
uncertain world, we think BAE is in a
strong position, and has long-term
potential. Those perceived strengths
do come with some extra risk though.
The shares change hands for 12.6 times
expected earnings, slightly above the
ten-year average.
A member of the Share Research Team
holds shares in BAE Systems.
4
BRITISH AMERICAN
TOBACCO
Cash king

British American Tobacco, with a market
cap north of £70bn, is the second largest
tobacco company in the world. And with
that scale comes pricing power.
But as consumers become more health
conscious, tobacco volumes are falling.
Squeezing more from less is the plan, and
so far that’s working. Sales at the full year
are expected to top £28bn, with annual
growth of just over 9%.
One of the key benefits for a tobacco
If we look at cash conversion, BATS has
been a consistently high cash generator
for years. That’s helped support a dividend
that’s grown at an annualised rate of 8%
over the last 10 years and £4.5bn of
share buybacks over that time. No
returns are guaranteed.
CASH CONVERSION
(CASH FROM OPERATIONS / OPERATING PROFIT)
120%
Paying down the debt pile is a draw on
cash. In 2017, BATS bought US-based
Reynolds in a cash and stock deal worth
$49.4bn. Debt’s reduced by more than
£8bn since then and BATS expects the
ratio of net debt to cash profit (EBITDA) to
be within the group’s target range of 2-3
times at the full year.

company is the low cost to make the

100%
products. A stable gross margin, hovering
just below 80%, proves that point. But it’s 80%

cash flow that really pays for things, and

BATS has that in abundance. 60%

40%

20%

0%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Refinitiv Eikon 16.11.22

5
New products are the main future growth
prospects. BATS has 3 global, market
leading, brands in categories like e-vapour
and heated tobacco. It’s early days for
this division, but losses are reining in and
profits are expected to flow in 2025.

There are social risks associated with

investing in tobacco, not least that the
sector is excluded from some institutional
products. The risk of regulators cracking
down on new products is also worth being
aware of.

BATS trades on a valuation some way

below its longer-term average and a
re-rate looks unlikely given the declining
volumes in traditional tobacco – still the
core performance driver. Instead, the
investment case lies on strong cash
generation and the prospective dividend
yield of 7.8% (variable and not a reliable
indicator of future income).

BRITISH AMERICAN
TOBACCO SHARE PRICE,
CHARTS AND HOW TO DEAL

6
BUNZL
Acquisition machine

Bunzl sources, consolidates, and delivers a Organic growth so far this year’s been
range of essential products to businesses. driven largely by higher prices, and that’s
Think food packaging, cleaning products expected to keep operating margins
and safety equipment – though that’s just
the tip of the iceberg.
within the longer-term trend of mid-high
single digits – no mean feat in the
Bunzl may not be
Bunzl’s essentially a mashup of
current environment.
a household name,
distribution businesses, around 150 in
fact. Each business has local knowledge
Rather than investing heavily in internal
growth, Bunzl is a merger and acquisitions
but underlying
of customers and suppliers to allow a
bespoke service at huge scale.
(M&A) machine. Most of the revenue
growth over the last 10 years has been
performance is
Revenue at the half year came in at
a result of acquisitions, with the group
spending an average of £317m a year
impressive.
£5.7bn, with that expected to rise on acquisitions over the same period.
to £11.9bn at the end of the current
financial year – a 16% rise on last year.
Impressively, revenue’s grown at an
annualised rate of 9% going all the way
back to 2004. There’s no guarantee
that continues.

7
M&A led strategies have their drawbacks.
If the pool of target companies dries up
or a business needs to raise external cash
to fund acquisitions, then it’s not usually
sustainable. Bunzl’s got the latter covered
though. Acquisitions have been backed
up by strong operating cash flow and the
balance sheet’s in a strong position too.

There’s a modest 2.2% prospective

dividend yield on offer, which has an
impressive history of growing at an CASH GENERATION AND SPEND
annualised rate of 10% since 1992. (£ MILLIONS)
No dividends are guaranteed. £900m

£800m

Bunzl may not be a household name, but £700m

underlying performance is impressive. A £600m

track record of doing well during tough £500m

times and steady growth are attractive £400m

qualities as economic uncertainty lingers. £300m
That hasn’t gone unnoticed though, with £200m
the group trading on a forward price to
£100m
earnings ratio of 18.4, ahead of the
£0m
wider sector. 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Capital expenditures Acquisition of business Cash from operating activities

Source: Refinitiv Eikon 15.11.22

BUNZL SHARE PRICE,

CHARTS AND HOW TO DEAL

8
PAYPAL
Cornerstone of the digital payments era

PayPal’s long been a leading player in

the digital payment arena, now operating
through over 430m active accounts in
over 200 markets.
A robust balance
Total Payment Volumes (TPV) are the
key driver of performance, at least at the
sheet and free cash
revenue level. Headwinds are building
for customers, but TPV growth’s still in
flow that's expected
the double digits over the year. PayPal’s
expecting fourth quarter revenue of about
to exceed $5bn this
$7.4bn, growing 9%.
year gives options.
PayPal's a beneficiary, and indeed an
architect, of an ongoing shift to digital
payments that was materially accelerated
by the pandemic. Yet, despite the scale,
PayPal's flagship platform has a lot of
market share it can go for, with consumer
penetration below 50% in its core markets.

9
 CONSUMER PENETRATION The main risk to PayPal is a prolonged
economic downturn that impacts
100%
spending. We see a lot of pain already
90%
priced into PayPal’s valuation, which is a
80%
good chunk below its long-term average.
70%
But the risk of further challenges for the
60%
shares remains very real. For those willing
50%
to accept the risks, PayPal could present
40%
an opportunity to invest in a leader in the
30%
electronic payment arena.
20%

10%
Remember, to invest in US shares you’ll
0%
US Germany UK France, Italy Canada Australia
need to complete a W-8BEN form.
& Spain

Source: PayPal Q2 2022 Investor Update

PAYPAL SHARE PRICE,

A robust balance sheet and free cash
flow that's expected to exceed $5bn this
year gives options. PayPal’s in a strong
position to make acquisitions to reach
new customers or distribute cash
to shareholders.
We’ve been pleased to see PayPal working
closely with other enablers of eCommerce,
rather than going head-to-head. Apple’s
an example where work’s being done to
help iPhones become a payment
CHARTS AND HOW TO DEAL
terminal for vendors. Moves like this
reduce dependence on revenues from
PayPal’s former parent, eBay.
There are also plans to enable both
PayPal and Venmo (owned by the group)
credit cards to be added to Apple Wallets.
This gives users further opportunities to
choose PayPal as their preferred payment
option, both online and in-store.

10
VOLVO GROUP
On the road to income and growth?
This isn’t the car company you might be
thinking of. Today, Volvo is a truck and
industrial equipment giant. Last year there
were around 2.8m Volvo trucks, buses and
machines rumbling around.
We admire the group’s high barriers to
entry - Volvo’s manufacturing and supply
chains are enormous, expensive and
complex, helping to protect market share.
Volvo has enviable visibility over demand.
The order intake for trucks was around
258,000 last year as customers replaced
old trucks and expanded their fleets.
Volvo not only produces vehicles, but VOLVO NET SALES BY SEGMENT 2021
services them. A 24/7 global servicing
support network is a serious asset. If your
truckful of goods is stuck somewhere, you
need to have faith it can get moving ASAP.
That feeds into more reliable revenue.
Services currently make up just over a fifth
of overall revenues, and is expected to
increase to over 50% by 2030.
The group’s also benefiting from booming
e-commerce (those extra online orders
mean increased need for logistics). Volvo
is also a leader in the electrification of
heavy-duty vehicles. Volvo wants over
35% of its vehicle sales to be electric by Trucks 62%
2030. We view being a front-runner of Construction equipment 25%
sustainable haulage a real plus point. Buses 4%
Volvo Penta 4%
Financial services 4%
Other 1%
Source: Volvo Group annual report 2021
11
In the medium term, cost inflation and
wider supply chain issues are problematic.
We think taking a more cautious approach
to new orders is the prudent thing to do.
Volvo is an expensive business to run at
the best of times, so underlying operating
margins of close to 10% are the norm.

The steadier style of Volvo’s revenue

means it’s able to pay dividends,
supporting a 5.1% dividend yield. The
proportion of the group’s earnings paid as
a dividend is low, which can make these
payments more resilient in a downturn and
provide scope for dividend growth. Please
remember nothing is guaranteed.

We view Volvo as a steady-Eddie with

longer-term growth and income potential.
There are some immediate challenges
around supply chains and inflation, which
the market has priced in with the price to
earnings ratio of 10.5 some way below the
longer-term average.

VOLVO SHARE PRICE,

CHARTS AND HOW TO DEAL

12
How to invest in these shares
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