COMMENT
Two Years Of Bull... And The Market Still Looks Cheap

"This market is a buy... So scrape together your savings, summon up the courage and pile into the market. FTSE 3,287 is a fantastic long-term buying opportunity." -- The Motley Fool, 13 March 2003.

FTSE 3,287 was a fantastic long-term buying opportunity. It was the bear market low and a two-year bull run has since seen the market rally 59%.

But get this: the FTSE 100 still looks cheap.

It wasn't hard to spot the value in shares during March 2003. The FTSE's dividend yield (then 4.24%) briefly exceeded the income from ten-year government bonds (then 4.05%) for the first time in decades. That gave as clear and as certain a buy signal investors can ever expect.

In fact, fourteen cheap blue chips were highlighted at FTSE 3,287. Notably, investors didn't have to dabble with speculative companies to make supersonic gains on the market rebound. Boring old supermarkets, banks and food and drinks firms all did sensible share pickers proud:

But two years on and standing at 4,962, can the FTSE 100's upward momentum continue? Yes it can.

First, the market still languishes on a low price to earnings (P/E) ratio. The FTSE 100 sported a P/E of 14.8 at last night's close -- just a fraction above the 14.4 witnessed when the FTSE crashed to 3,287! And as this article notes, the number of times the market's P/E has traded on a profit multiple lower than 15 in the last ten years can be counted on one hand.

The leading index has also provided some rather rapid dividend growth of late. Though the FTSE 100's dividend yield has reduced during the bull run to 3.2%, data from FTSE suggests aggregate blue-chip payouts have grown by 10% over the past twelve months. In addition, the gilt/market yield ratio stood at 1.54 last night -- some way below its 1.96 long-term average.

And backing up the dividend payouts are some massive share buybacks. In the first ten weeks of 2005 alone, blue chips spent £2.9b purchasing their own shares. With numerous FTSE majors seemingly committed to returning excess cash to shareholders in this manner, it's not difficult to envisage a total buyback spend of, say, £13b this year, which in turn gives an implied market 'buyback' yield of about 1.1%.

To summarise, today's investors can still enjoy one of the lowest market P/Es of the last decade, as well as receive a fast-growing 4.3% 'dividend and buyback' yield. Despite the two-year rally, the FTSE 100 remains cheap.

What now?

March 2003 has been and gone. But you can still prosper from the stock market in 2005 and beyond. Learn more about low-cost FTSE index trackers here.

Maynard owns shares in GlaxoSmithKline, iShares FTSE 100 (an exchange-traded fund that tracks the FTSE 100 index) and contributes regularly to an index tracker.