VALUE INVESTING
FTSE 100 Value

By Stephen Bland (TMFPyad)
February 15, 2002

From time to time I do a feature like this where I have a look at the index from a value investor's perspective. The three principal fundamental ratios used in share analysis by most value investors are P/E, Yield and P/TBV (Price/Tangible Book Value). These are the mechanical start points for further investigation into a potential value share and represent also three of the four cornerstones of my own value locating apparatus, which I have long acronymed as pyad, the 'd' bit being debt, specifically the absence of.

So using a database which enables me to filter on such things, I will have a look at the FTSE100 and, not unlike a bag lady, rummage around the rubbish in the hope of finding something interesting, the dog end with a bit of a smoke still left in it.

Incidentally why are bag ladies only ladies? Nobody seems to talk about bag men. Odd, especially since they exist and indeed outnumber their female counterparts by a long way I'd guess.

Anyway here it is. Note that the yields and P/Es are based on consensus analysts' forecasts, whilst the P/TBV is based on the last annual accounts without updating for any interim figures or news that may have been published since. Also, note that this is a purely mechanical search and I am making no comment at all on the qualities of any shares here as investments. Anybody interested must therefore look further into any that appeal on these ratios.

Ten lowest P/Es 
Old Mutual (LSE: OML)                            6.6
Royal & Sun (LSE: RSA)                           9.2
Rolls-Royce (LSE: RR.)                           9.3
Lattice (LSE: LAT)                               9.5
British American Tobacco (LSE: BATS)             9.6
Innogy (LSE: IOG)                               10.3
Gallaher (LSE: GLH)                             10.6
Wolseley (LSE: WOS)                             10.7
Hanson (LSE: HNS)                               10.8
United Utilities (LSE: UU.)                     10.9

Ten highest yields                                %
Canary Wharf (LSE: CWG)                         13.2
United Utilities (LSE: UU.)                      7.9
Scottish Power (LSE: SPW)                        6.6
Severn Trent (LSE: SVT)                          6.5
Rolls-Royce (LSE: RR.)                           6.0
Lattice (LSE: LAT)                               5.4
Scottish & Southern Energy (LSE: SSE)            5.4
Old Mutual (LSE: OML)                            5.4
Gallaher (LSE: GLH)                              5.4
British American Tobacco (LSE: BATS)             5.3

Ten lowest P/TBVs 
Cable & Wireless (LSE: CW.)                      0.7
British Land (LSE: BLND)                         0.7
British Airways (LSE: BAY)                       0.7
Land Securities (LSE: LAND)                      0.8
Lattice (LSE: LAT)                               0.9
Royal & Sun (LSE: RSA)                           0.9
Severn Trent (LSE: SVT)                          1.2
BHP Billiton (LSE: BLT)                          1.2
International Power (LSE: IPR)                   1.2
United Utilities (LSE: UU.)                      1.2

What we are seeking, as you might expect, are multiple appearances. Well, three of these shares appear in all three lists, being Lattice, United Utilities and Royal & Sun. Two of these are utility shares, United supplying water and electricity though it is placed in the water sector, whilst Lattice is in gas. Royal & Sun is predominantly a general insurer.

Note that although Royal does not appear in the yield list, in fact it tied tenth with BATS on 5.3% and therefore does qualify as a three lister.

Of these three shares, two only have P/TBVs under one, being Lattice and Royal. Trading below book is a value investor's idea of heaven, running sex well into second place. Note though that property companies, of which there are two in the list, will nearly always trade below book.

As more experienced investors, value or otherwise, will know there are a large number of other various ratios that can be used by investors to come up, mechanically, with a list of shares that merit further investigation according to the strategy being followed. Some may ask why I would choose these three particular ratios for a trawl.

The answer is that they are the most popular. Psychological factors are very important in value investing. Going against the crowd may be difficult for some people for example. Also, the whole thing is about perception more than reality anyway.

What is any given share worth? A P/E of 5, 10, 20, 100, more? And what about tomorrow, why should it suddenly be worth more or less despite there being no change in the company's fortunes? Good old human nature is the answer. So studying this pays rewards hence the importance of psychological factors. Personally I am not one for real or intrinsic values, a theoretical concept which I find of little use in practice, though I know many investment writers dwell on it, using all sorts of mathematical contrivances to estimate this magic figure.

After following the stock market for longer than many of our readers have even been alive, I long ago came to the conclusion that there is no reality with shares, just a shifting and utterly fickle perception. So I could argue that what the value investor is really trying to do is to catch the perception graph of a share at a point from which she believes that it is more likely to go up then down in the nearish term future. Now since the majority of other investors, upon whom we depend to out the value, tend to use common ratios like P/E it makes sense for the value player to share the same tools whether or not we think them ideal for the task.

And real or intrinsic value? – the only share that has this is cash.