Footsie Value

By Stephen Bland | 17 January 2007

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A little gig I like to run occasionally for readers is to examine what value may be lurking amongst our biggest caps on three popular criteria -- yield, P/E and Price/Book Value (P/BV), being three of the four that I have always used in my value searches over the years.

Debt is the missing item here of my usual four fundies requirements, the reason being that banks and insurers are usually excluded from database debt data and thus a low debt list omitting those major sectors would not be comparable with the other three lists.

Note that I have used only book value here in the P/BV calculation, not tangible book, simply because these figures were pulled off a database which doesn't do tangibles only.

Databases in my experience sometimes contain errors and omissions so anyone wishing to make use of this information should validate the figures by examining the companies' accounts, news etc.

Ten Highest Forecast Yields

*including special dividend

Ten Lowest Forecast P/E

Ten Lowest P/BV

What I'm looking for are multiple appearances and in particular a showing in all three tables, indicating the most value relative to the index. In the past this method has thrown up some good value plays amongst big caps. Unfortunately on this occasion I don't have a three lister.

There are though several two tablers. Power station Drax is both a high yielder and a low P/E but be careful there, the yield includes a special dividend. Kingfisher is both a high yielder and low P/BV as is Vodafone. Somewhat oddly perhaps, investment company 3i makes both the low P/E list and low P/BV list as does Shell.

What to make of this? Well assuming you are prepared to invest on the basis of just two list appearances instead of the monty three, it depends where your value sympathies lie. That is, which of the ratios appeal to you more than the others? Many of us have some preferences for, say, yield over P/E or whatever.

Personally, I have always put an emphasis on yield simply because it gives you a decent return whilst you are waiting for the value to out, but others don't worry too much about a modest yield if the other value criteria stack up sufficiently.

Apart from multiple appearances there are some very interesting features revealed by all this. Take a look at the low P/E list. It contains six miners. If you include the two oils as being the same kind of industry, then eight of the ten are holes in the ground. A very surprisingly high proportion of the low P/Es are drawn from that sector. No prizes then for guessing which sector is utterly out of favour with the market -- and how. When the market trashes a whole sector it really does it in style, a mirror image of what it does on the upside sometimes. This fact alone might attract investors, including myself with holdings in both BP and Billiton.

Now consider the low P/BV shares. Frequently this list will contain a number of property companies trading below book. Sure enough, we have three property companies in the list, but they're all trading a fair way above book, though the figures are based on historical data.

Property shares are at their relative cheapest when well below book. Substantial profits could have been made by purchasing shares like Land Securities a few years back when it did stand at a discount to book. These shares make very attractive value plays at times when property is out of favour. It is a cyclical thing and you need great patience because property cycles are several years in duration and as usual for a value player you need to ignore all the pessimism. But the rewards for that patience are very attractive. Decent yields too can be obtained whilst waiting.

Of the above I own Alliance & Leicester, BHP Billiton, BP, BT, DSGI, Lloyds, United Utilities