This Market Is A Buy

A low P/E, growing dividends and booming buybacks says this market is a buy.

Here are three reasons why I think this market is a buy:

1) Low P/E: At 5,820, the FTSE 100 is valued at just 12 times earnings. Prior to recent weeks, the last time the market traded at such a low multiple occurred during 1990!

Indeed, base rates and gilt yields were about 10% back then. But with base rates and gilt yields now below 5%, I feel today's earnings yield (i.e. the inverse of the P/E) of 8.3% looks much more attractive. In fact, I reckon the current relationship between the market's P/E and gilt yields is the most attractive for share buyers for at least twenty years!

2) Growing earnings and dividends: It's not as if Britain's biggest businesses are struggling either. FTSE statistics suggests blue chips have on aggregate improved their earnings by a whopping 33% during the past twelve months:

Though buoyant commodity prices have no doubt helped profits at heavyweights such as BP (LSE: BP.) , Royal Dutch Shell (LSE: RDBS) and Rio Tinto (LSE: RIO) , a 10% overall dividend improvement suggests underlying blue-chip progress remains healthy. Supporting the optimism, only one FTSE 100 interim dividend declared since the end of June -- that of Lloyds TSB (LSE: LLOY) -- was held. All the others were raised!

3) Booming buybacks: Blue-chip companies continue to generate excess cash over and above their dividend requirements and buy back their shares in grand fashion. After reading 41 blue-chip interim results published during July and August, I reckon buybacks totalled approximately £11b in the first half of 2006. As well as the major oil and mining groups, notable buybacks also occurred at AstraZeneca (LSE: AZN) , GlaxoSmithKline (LSE: GSK) and HBOS (LSE: HBOS) . Full-year repurchases totalling something like £22b imply a 'buyback yield' of 1.5% -- and a significant 4.7% 'excess cash yield' when added to the market's current 3.2% dividend yield.

What now?

Here's what I think you should do:

1) Buy the market: Visit the Fool's index tracker centre and learn about a cheap and easy way to back the FTSE. Monthly contributions can start from as little as £50 a month.

2) Buy cheap shares: Visit Champion Shares and discover which EIGHT shares I recommend you purchase in today's lacklustre market. My current 'buy list' is dominated by modest P/Es, good yields, decent prospects and conservative balance sheets. This free 30-day trial of Champion Shares comes with no obligation and reveals all fifteen recommendations -- plus many other share ideas!

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