VALUE INVESTING
Mechanical Value in the FTSE

By Stephen Bland (TMFPyad)
May 11, 2001

Occasionally I find it interesting to run three of the most common value filters over this index: yield, price/earnings and price/tangible book value. The index constituents are revised quarterly and the fundamentals of the shares will change as their prices and latest accounting data vary. Consequently different shares may be selected when the process is repeated at a later date. I last ran this selection at the beginning of March 2001.

Note that the database I employed uses forecast figures for earnings and dividends per share. Net asset value is from the last published annual report, but sometimes the latest one is not yet incorporated into the figures even though it has been published, so this can be well out of date. The whole thing is only a rough mechanical view of big cap value as a starting point so I am not advocating that anyone buys on this basis alone. If readers are interested they should investigate further. I make no comment in this article as to the quality of the shares shown.

Ten lowest P/E ratios

Railtrack (LSE: RTK)                    6.2
Old Mutual (LSE: OML)                   7.5
British American Tobacco (LSE: BATS)    8.7
ICI (LSE: ICI)                          9.6
Invensys (LSE: ISYS)                    9.8
Imperial Tobacco (LSE: IMT)             9.9
Scottish & Newcastle (LSE: SCTN)       10.3
Rolls Royce (LSE: RR.)                 10.5
Blue Circle (LSE: BCI)                 11.1
United Utilities (LSE: UU.)            11.1

Ten highest dividend yields

United Utilities (LSE: UU.)             7.8
Railtrack (LSE: RTK)                    6.2
Scottish & Newcastle (LSE: SCTN)        6.0
Scottish Power (LSE: SPW)               6.0
Invensys (LSE: ISYS)                    5.8
British American Tobacco (LSE: BATS)    5.8
Royal & Sun Alliance (LSE: RSA)         5.6
PowerGen (LSE: PWG)                     5.4
Lattice (LSE: LAT)                      5.3
Scottish & Southern Energy (LSE: SSE)   5.2

Ten lowest price/tangible book ratios

Railtrack (LSE: RTK)                    0.7
Lattice (LSE: LAT)                      0.8
Land Securities (LSE: LAND)             0.9
Vodafone (LSE: VOD)                     1.0
Associated British Foods (LSE: ABF)     1.3
British Airways (LSE: BAY)              1.3
Bass (LSE: BASS)                        1.3
United Utilities (LSE: UU.)             1.3
Scottish & Newcastle (LSE: SCTN)        1.4
Royal & Sun Alliance (LSE: RSA)         1.5

We are seeking multiple appearances, and this time three shares appear in all three lists: Railtrack, United Utilities and Scottish & Newcastle. The last time I did this, United Utilities was the only share to qualify and the time before that Scottish & Newcastle was the sole qualifier. Having three shares at once is therefore a record for this series of articles.

By chance I did an article on Railtrack very recently where I discussed its merits as a judgemental value play. Actually Railtrack does more than merely appear in all three lists, it is top of the lowest P/TB and of the lowest P/E and second in the highest yield series. Also it is one of only three FTSE 100 shares trading below book value. Thus it is the outright winning mechanical Footsie value share by a long way at present. It is also one of the smallest companies in the index and thus if it remains so, it may well be dropped at the next quarterly reselection. Being dropped from the index, although somewhat ignominious, is not necessarily bad for the share price, contrary to certain uninformed popular opinion based on the need for FTSE 100 tracker funds to sell a share that exits the index. Life just ain't that simple in the market.

The author owns shares in Scottish & Newcastle.