Are these the best large cap stocks to watch in May 2024?

Large capitalisation stocks are companies with a market capitalisation of around more than £1 billion. In the UK, these tend to be listed in the FTSE 100, in the US, the S&P 500. A company’s market capitalisation or value is its share price multiplied by the number of shares in issue.

Typically, companies with a large market capitalisation tend to be more mature and therefore more stable investments than smaller firms. The shares can also be easier to buy and sell because the investments are more liquid. This means that buyers and sellers of these stocks are more readily available than they may be for smaller, less liquid stocks, which it may be harder to make a market in.

That said, even large companies can fail – take for example Debenhams and Credit Suisse - so it’s important to do your own research.

Best large cap shares to watch

Here are some of the large stocks we think may be worth watching in May 2024. These have been chosen for recent market news.

Past performance is not an indicator of future returns.

1. IAG
2. Diageo
3. Sage
4. Imperial Brands
5. Tesco

IAG (LON: IAG)

The airline and holiday sectors continue to get back to normal following the Covid pandemic. International Airlines Group (IAG) owns British Airways, Air Lingus, Vueling and Iberia. Full year operating profits increased to €3.5 billion from €1.2 billion last year, while operating margins improved to 11.9% from 5.4% in 2022 thanks to the company's restructuring programme. Meanwhile, IAG delivered net cash flow of €1.3 billion over the period.

Capacity increased by 22.6% versus the previous year, as the company focused on its core North Atlantic and South Atlantic markets. Passenger unit revenue in 2023 was 8.2% higher than in 2022, driven by strong leisure traffic - business traffic is recovering more slowly, IAG says. Meanwhile, bookings are at 92% for the first quarter and 62% for the first half, which is an improvement on last year. Of course, potential risks remain the wars in Gaza and the Ukraine.

The stock trades on a price earnings ratio of just 5. The shares are up 23% over the past 12 months but are still trading some way from their five-year highs and at 144p could have further distance to travel.

Diageo (LON: DGE)

Drinks giant Diageo has had a rough year, with the sudden death of its longstanding chief executive Ivan Menezes and the poor performance of its Latin American and Caribbean (LAC) business. The company, which owns brands including Johnny Walker, Smirnoff, Don Julio and Bailey’s, issued a profit warning in November, revealing that a drop in sales in the LAC division would reduce net organic sales by 20% in the first half of 2024. The business accounts for 11% of the group’s net sales value. Indeed, at the half year results in January, revenues fell by 1.4% to $11 billion for 2023, due to currency fluctuations as the issues in the LAC division. Operating profits also dipped by 11.1% to $3.3 billion.

As such, the shares have fallen 23% to 2,866p. However, this weakness could represent a long-term buying opportunity for what is a quality company.

While the LAC business is being hit by falling consumption and consumers buying cheaper brands due to economic pressures, this is also set against strong comparative numbers in the previous year. What’s more, the company’s other regions are still performing well, with momentum strong in Europe and the Middle East, despite the Israel/Hamas conflict in Gaza and the Ukraine war, strong sales in Africa and Asia Pacific. Sales dipped in North America but are expected to recover in the second half of the year.

Diageo also managed to deliver net cash flow of $1.5 billion and return $500 million to investors over the period. It also made $335 million in cost cuts during the first half.

Over time, Diageo expects organic net sales growth to come of between 5% and 7% over the medium term, driven by its international spirits business. Analysts at broker Citigroup think the shares could reach 3050p.

Sage Group (LON: SGE)

The financial software firm Sage Group recently completed its transformation into a cloud computing company. Given the current tough economic environment, many small and medium-sized companies may be looking to save money by using Sage’s products. In its recent trading update, the company said that first quarter revenues increased by 10% to £573 million (from £522 million in the first quarter 2022), while sales in North America rose by 13% to £259 million (from £229 million last year). Sage Business Cloud revenues increased by an impressive 18% to £454 million. The company is also returning £350 million to shareholders through a share buyback programme.

Management also expect operating margins to improve this year, although organic revenue growth will remain flat. The shares have risen by 42% this year to 1,143p but analysts at brokers Bank of America and Citigroup think they could reach 1,300p.

Imperial Brands (LON: IMB)

Tobacco investments are not to everyone’s taste. However, these companies tend to generate a lot of cash, which can have attractions for income seekers. Indeed, Imperial Brands is returning the equivalent of £2.4 billion to investors in 2024 in dividends and share buybacks – 15% of its market capitalisation in November, according to the company.

The shares are down 7% this year, however, to 1,803p and currently trade on a price earnings ratio of just 7. This is due to worries about slowing growth in the tobacco market and regulator concerns about the safety of new vaping products.

Nevertheless, full year revenues for 2023 remained stable at £32.5 billion (£32.6 billion in 2022), while pre-tax profits increased to £3 billion (from £2.6 billion last year) due to cost cuts. Three out of five of Imperials main markets also saw growth during the period and growth is expected from the company’s vaping products.

Tesco (LON: TSCO)

Tesco shares are up 4% to 288p this year and remain worth watching. So far, the supermarket giant has been seen to hold a winning formula in the battle for customers amid the ongoing cost of living crisis. At the recent full year results, the company grew total group sales from continuing operations by 7% to £61.5 billion and said that it had enjoyed market share gains and was seeing positive market growth. Pre-tax profits increased by 160% to £2.3 billion.

Chief executive Ken Murphy said inflationary pressures are easing and that revenues rose due to lower retail prices. The company is also returning a further £1 billion this year to shareholders via a share buyback scheme.

Tesco also announced that it is selling its banking division to Barclays for £700 million, although this will ultimately result in a £628 million post-tax loss. The deal creates a partnership with the bank which should generate operating profits of £80 million to £100 million this year.

Meanwhile, for the current financial year, Tesco expects to deliver retail adjusted operating profit of at least £2.8 billion and retail free cash flow of between £1.4 billion to £1.8 billion.

Analysts at broker Barclays have a price target of 335p on the shares, which trade on a price earnings ratio of around 11 and currently yield 4%.

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Top large cap shares to watch summed up

The above five companies are just a small selection of top stocks to watch among the large capitalised companies. Remember that big companies can also fail and always do your own research.

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*Based on revenue excluding FX (published financial statements, October 2021).