VALUE INVESTING
Value In The FTSE 100

By Stephen Bland (TMFPyad)
September 21, 2001

Overwhelming demand from readers (I got two messages on the value board) leads me to conduct a review of what value might be lurking in the FTSE100 using three popular value ratios. It's an exercise I carry out from time to time as it may provide some interesting leads for those value investors who prefer to concentrate on the largest caps in the market.

A few words of warning. The data I use is based upon forecasts for earnings per share and dividends. Some of these may not yet have been updated for those shares affected by the recent events in America, particularly where involved in the insurance, transport and hotel industries which have fallen very sharply in recent days. Apart from those, others have already announced dividend cuts so that the yield figures will be unreliable in those cases. Thus more than usual perhaps any investor contemplating these shares must be extra careful. Tangible book value is based upon the last annual accounts, with no recognition of any changes that may have occurred with the publication of any interim figures since.

Note that I am giving no indication as to what I think are the merits of any of these shares. This is purely a mechanical listing.

Ten lowest P/E ratios 

Old Mutual (LSE: OML)             5.1
Invensys (LSE: ISYS)              5.9
Rolls-Royce (LSE: RR.)            6.5
ICI (LSE: ICI)                    7.6
Dimension Data (LSE: DDT)         8.7
Six Continents (LSE: SXC)         8.7
Smiths Group (LSE: SMIN)          8.7
GKN (LSE: GKN)                    9.0
Anglo American (LSE: AAL)         9.1
Barclays(LSE: BARC)              9.1

Ten highest yields 

Canary Wharf (LSE: CWG)          24.2
Marconi (LSE: MONI)              11.2
British Airways (LSE: BAY)       11.0
Invensys (LSE: ISYS)              8.5
Royal & Sun (LSE: RSA)            7.6
United Utilities (LSE: UU.)       7.5
Scottish Power (LSE: SPW)         6.7
Rolls-Royce                       6.6
Six Continents                    6.3
Cable & Wireless (LSE: CW.)       6.0

Ten lowest Price/Tangible Book 

British Airways                   0.6
Colt Telecom (LSE: CTM)           0.6
Cable & Wireless                  0.8
Land Securities (LSE: LAND)       0.8
BHP Billiton (LSE: BLT)           0.8
Lattice Group (LSE: LAT)          0.9
Six Continents                    1.0
Royal & Sun                       1.0
United Utilities                  1.3
Dimension Data                    1.3

The Canary Wharf yield appears totally incorrect to me. I suspect it is an error on the database I used. Marconi will not be paying a dividend over the next year I understand so that the quoted yield is worthless, a case of not having been revised yet, and I suspect there has to be a lot of doubt about British Airways payout in the near future as well. So, as I mentioned above, there are lot of doubtful shares in these lists in that the ratios will not be of much use. That said though there are quite a few here that are valid on the ratios shown and which therefore may be potentially attractive for both short and long term investors.

One thing that has struck me is the reduced incidence of utilities. Usually there are quite a few more, but now we have only permanent Footsie value favourite United Utilities plus Scottish Power and Lattice making appearances. Some of the other utilities that have shown up in past versions of this have been squeezed out by the collapse of shares such as Rolls-Royce and British Airways. Another old Footsie value regular that fails to appear this time is brewer Scottish & Newcastle, a share that has stood up immensely well to the large market fall. Similarly we have no tobaccos this time round.

A lot of the falls that have occurred make little real sense and thus create potential opportunity for those with the necessary cojones to lock in very high and growing yields for long term players, or possible crisis plays for those of a more short term inclination.

What investors must understand is that the risk is actually reduced for good shares particularly if you are a medium to long term player. If a share was good at a price of X a few weeks ago and you were thinking of buying it, perhaps as part of an income portfolio or other long term investment, then it has to be far better at 0.75X. Don't fall for recent events syndrome, that attitude of the mugpunter whereby something that happened very recently is overweighted in the mind compared with lengthy history.

This doesn't mean that the share cannot go down further but nobody can call the bottom. The same share after a large drop in a few weeks has got to be a better attraction than before, assuming you consider its long term prospects to be unchanged of course. But don't let recent events pervert your consideration of those long term prospects. The international hotel industry for example is not going to suffer long term because of the US. In my view for a large number of blue chip shares, what happened recently will make no difference at all in the long run.

As always though careful share selection is the rule. Certain industries to my mind are never attractive for the long term player.

The author owns shares in Scottish & Newcastle.