The FTSE 100 is at its lowest since July. Have these shares become too cheap?
Market declines present opportunities to pick up great shares at bargain prices. The FTSE 100 (UKX) is down 5.3% in the last month. Could it be time to start buying blue-chip shares again?
I trawled the market to find FTSE 100 shares trading within 7% of their 52-week low. Some are trading near multi-year lows.
|Name||Price (p)||P/E (forecast)||Yield (forecast, %)||Market cap (£m)|
|Royal Dutch Shell||2,098||7.8||5.3||131,313|
|WM Morrison Supermarkets||256||9.5||4.6||6,174|
The challenge for anyone researching these shares is deciding whether they are undervalued. If so, you might expect a bounce-back and some nice dividends along the way. However, if the company is entering a genuine decline, buying the shares could damage your wealth.
1) Royal Dutch Shell
The Anglo-Dutch oil giant Royal Dutch Shell (LSE: RDSB) is a genuine stock market titan.
Shell's shareholder dividend has not been cut since the end of the Second World War. According to Capita's Dividend Monitor report, in 2011 Shell paid a total of £6.7bn in dividends to shareholders. No other FTSE 100 company managed to pay as much.
Thus far, Shell has declared three quarterly dividend payments of $0.43 per share. This suggests that the company may be on track to pay $1.72 of dividends for the full year.
That would represent a 2.4% advance on 2011's total payout of $1.68. Analysts forecast another small rise in 2013. On the earnings front, profits are expected to dip slightly this year before rising 5.0% in 2013.
This means that Shell is trading on a prospective 2013 yield of 5.4% and a 2013 price-to-earnings (P/E) ratio of just 7.5. Only in the very depths of the financial crisis did the shares offer better value.
2) Wm Morrison Supermarkets
Tesco is not the only supermarket that has endured a tough 2012.
According to market researchers Kantar Worldpanel, Wm Morrison Supermarkets (LSE: MRW) now has 11.4% of the UK grocery market. One year ago this was 11.8%.
This decline is affecting expectations of Morrisons' profitability. This time last year, the broker community were estimating Morrisons would report earnings per share (EPS) of 29p for 2013. Now, this figure has fallen to 27.1p.
As profit forecasts have declined, so has the rating that the market awards Morrisons' shares. One year ago, shares in Morrisons were 310p. That year, Morrisons' reported EPS of 26.1p. That's a P/E of 11.9.
Now, Morrisons trades on just 9.5 times forecast profits.
Nonetheless, Morrisons' dividend has been progressing nicely. From 4.0p per share in 2008, the 2012 figure hit 10.7p. For the next year, the dividend is expected rise 10.0% to 11.8p.
That is the cheapest the shares have been in five years. It seems a fair price, given growth expectations of just 3.9% profit this year.
Shire (LSE: SHP) is currently priced at 13.6 times 2012 profit estimates and has an expected yield of 0.6%. Like Shell, this means that Shire has not been as cheap since the credit crunch.
Better growth is expected from Shire than Shell. Analysts forecast 28.0% EPS growth for 2012, followed by 8.2% growth in 2013. The dividend is expected to rise 31.3% this year and 20.6% the next.
Shire has delivered compound annual earnings growth of 30.1% per annum in the last five years. By the same measure, the dividend has been rising 13.2% a year on average.
You might be surprised that Shire is available to buy at just 12.5 times consensus forecasts for 2013 profits. Typically, the market reserves a valuation like that for a company with only modest growth prospects.
The problem is, pharmaceuticals like Shire are always under pressure from rival generic drugs. An announcement from the company earlier this year cast doubts over the long-term earnings from its attention deficit disorder drug Adderall XR.
At the current valuation, I would say the market is still making up its mind about Shire.
Ten years ago, Vodafone (LSE: VOD) was a high-tech go-go share. Investors at that time were being asked to estimate Vodafone's long-term profit potential with little history to go on.
That's always incredibly difficult. I'm glad that I steered clear of the company at the time. Long-term holders will have been disappointed with Vodafone's share price progression in the last decade.
However, as the industry has matured, Vodafone has become a different kind of share. Although the share price may have disappointed, Vodafone's dividends have impressed.
From 1.47p in 2002, Vodafone has increased its dividend every year. For 2012, the payout hit 9.52p per share. This was further augmented by a 4.0p special dividend.
The result is that Vodafone is now expected to overtake Shell as the FTSE 100's biggest dividend payer.
With recent interim results, the company confirmed a 7.2% increase in its interim dividend. While there will not be a special dividend this year, the company will be buying back its shares in the market.
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> David owns shares in Vodafone. The Motley Fool owns shares in Tesco, and has recommended shares in Vodafone.