VALUE INVESTING
FTSE 100 Value

By Stephen Bland (TMFPyad)
May 3, 2002

From time to time I know that some readers find it useful to identify the shares offering the most value in the FTSE 100 index. These will not usually be the kind of deep value shares often discussed on the value board because most of the latter tend to be smaller caps. It is very rare that a FTSE100 company becomes a full pyad share so the following are not that deep, merely those in the index which are currently the cheapest on three of the most popular share valuation criteria, namely P/E, Yield and P/TBV.

Note that this is purely a mechanical exercise and consequently I am making no comment as to the quality of these shares. They do form a good basis for some big cap value investigation in my view though. P/E and yield are consensus analysts forecasts, P/TBV is from the last annual accounts without updating for any interim or news since.

Ten lowest P/E 
Old Mutual (LSE: OML)                   8.5
Royal & Sun (LSE: RSA)                  8.7
CGNU (LSE: CGNU)                       10.5
British American Tobacco (LSE: BATS)   10.6
Hanson (LSE: HNS)                      11.3
Anglo American (LSE: AAL)              11.4
Gallaher (LSE: GLH)                    11.4
Logica (LSE: LOG)                      11.7
Safeway (LSE: SFW)                     12.0
Allied Domecq (LSE: ALLD)              12.1

Ten Highest Yield                         % 
Scottish Power (LSE: SPW)               9.2
United Utilities (LSE: UU.)             7.2
Severn Trent (LSE: SVT)                 6.0
Royal & Sun (LSE: RSA)                  5.5
Abbey National (LSE: ANL)               5.2
Scottish & Southern Energy (LSE: SSE)   5.1
PowerGen (LSE: PWG)                     5.0
British American Tobacco (LSE: BATS)    4.9
Lloyds TSB (LSE: LLOY)                  4.9
Scottish & Newcastle (LSE: SCTN)        4.8

Ten Lowest P/TBV 
Cable & Wireless (LSE: CW.)             0.5
British Land (LSE: BLND)                0.7
British Airways (LSE: BAY)              0.8
Corus (LSE: CS.)                        0.8
Land Securities (LSE: LAND)             0.9
Lattice (LSE: LAT)                      1.0
BHP Billiton (LSE: BLT)                 1.1
Royal & Sun (LSE: RSA)                  1.2
International Power (LSE: IPR)          1.2
Severn Trent (LSE: SVT)                 1.2

A glance at these lists reveals some interesting facts.

Looking at the low P/E list, the point that hits me is that the top three slots are all occupied by insurance companies, an indication just how out of favour this sector is at present. This sort of situation can be attractive because insurance is a cyclical business and it follows that buying at a low point in their cycle may prove rewarding for those with patience, a quality needed in any event by all value investors. I am not though surprised by the presence of two tobacco companies in this list. They will more often than not be lowly rated because of the constant threat of litigation. However they have proved to be great investments on many occasions.

It is not surprising that the high yield list has a large representation of utilities. These nearly always trade at very high yields relative to the market because most of their business is regulated. Two banks are present and one of the high yield investors' favourite shares, Scottish & Newcastle. Four of these ten shares are in my High Yield Portfolio that I set up about eighteen months ago.

The low P/TBV list contains five companies trading below book, of which two are property companies as usual, because these traditionally trade below book, as do most companies where asset creation rather than earnings is the name of the game. Investment trusts are similarly rated.

The thing to look for is multiple appearances and only one company – Royal & Sun – appears in all three lists. This share is a regular on the value board. Whether its appearance in all these lists though makes it an attractive share right now for value investors is something I leave readers to decide for themselves, but I definitely do not advocate buying it for this reason alone.