VALUE INVESTING
FTSE100 Value

By Stephen Bland (TMFPyad)
September 6, 2002

An exercise that's worth repeating every so often is to look for value in the FTSE100 index, purely on a mechanical basis initially. Any interesting looking candidates might then merit further investigation by readers who like the idea of very large cap value shares. It will be extremely rarely that such a search would throw up a full pyad share, these are hardly ever big caps, but nevertheless some worthwhile value plays have come up in the past with this method, looking at the three most common value criteria: P/E, Yield and P/TBV.

Note that because of the structure of the database I used to compile these tables, the P/Es and yields are based on consensus broker forecasts whilst the book values are from the last annual accounts, without updating for any news or interims since. Anyone interested must therefore carry out further research on matters such as debt, recent interims or news and so on. As I mentioned, the data is purely mechanical and I have not looked into the merits of the companies. Consequently I am making no comment as to the qualities of these shares as investments.

Ten lowest P/Es 

Royal & Sun(LSE: RSA)                 3.6
Old Mutual(LSE: OML)                  5.3
Aviva(LSE: AV.)                       7.2
International Power(LSE: IPR)         7.3
Safeway(LSE: SFW)                     7.8
Anglo American(LSE: AAL)              8.1
Hanson(LSE: HNS)                      8.3
Xstrata(LSE: XTA)                     8.7
Abbey National(LSE: ANL)              9.0
ICI(LSE: ICI)                         9.2


Ten highest yields 

Canary Wharf(LSE: CWF)               11.7
Royal & Sun(LSE: RSA)                10.5
United Utilities(LSE: UU.)            7.9
Abbey National(LSE: ANL)              7.8
Severn Trent(LSE: SVT)                7.1
Lloyds TSB(LSE: LLOY)                 6.8
Scottish Power(LSE: SPW)              6.7
Old Mutual(LSE: OML)                  6.7
Rolls Royce(LSE: RR.)                 6.6
Six Continents(LSE: SXC)              6.5


Ten lowest P/TBVs 

Royal & Sun(LSE: RSA)                 0.5
Corus(LSE: CS.)                       0.6
British Land(LSE: BLND)               0.6
Cable & Wireless(LSE: CW.)            0.6
International Power(LSE: IPR)         0.7
Land Securities(LSE: LAND)            0.7
British Airways(LSE: BAY)             0.8
BHP Billiton(LSE: BLT)                0.9
Six Continents(LSE: SXC)              1.0
Aviva(LSE: AV.)                       1.0

This analysis certainly shows you the out of favour sectors as far as the FTSE100 is concerned. There are three insurance companies in the low P/E list, Royal, Old Mutual and Aviva. In fact they are the lowest three in the list. Also, and this might be a little surprising, we have two miners here, Anglo American and Xstrata.

The high yielders reveal the usual crop of utilities which traditionally trade at much greater than average yields. The out of favour sectors, though, include insurers again and a couple of banks, Abbey National and Lloyds.

The low price to book shares include two properties, British Land and Land Securities, which normally trade below book in any case. Insurers feature again here and another miner, BHP.

Amongst the most interesting facts revealed are those companies that may appear on all three lists. Sometimes there are none, sometimes one or two. This time we have only one, general insurer Royal & Sun, a company whose shares have been very severely hit in recent times. Insurance companies, short term, tend to be a geared play on the market, a bit like an investment trust, and consequently in a recovery are likely themselves to recover strongly in the absence of other strongly negative factors peculiar to any particular company.

Thus, if bought when trading well below book value, it is possible to do well because they will likely go to over book in a recovery. The problem, of course, is to know when this may happen. Since they hold a lot of investments, book value itself is a moving target and it is quite easy to buy below what you think is the book value and then find yourself in fact being over book at your buying price if their investments have fallen in the meantime. Such is the risk involved in timing an insurance investment in a bear market.

I believe it likely though that investments in insurance companies right now are likely to prove very rewarding in the longer term, provided you can stomach any further falls that may occur meanwhile. This kind of situation is definitely buy time in my view. You can't call the exact bottom.

Mining is interesting too. Political factors in South Africa may have influenced these as well as the general bear market creating negative sentiment. Demand for minerals in general is allied to the state of the world economy and, as always with value-seeking investors, the time to buy is when everyone else perceives it to be wrong.

I would say that banking looks good right now for the long term as well. Shares like Abbey National and Lloyds are on terrific yields and Abbey features also in the low P/E list. Clearly the dividends could be cut at some point, but that is the risk you take. Yield is a good timing device for buying bank shares because they tend to hold or increase their dividends.

Most shares have fallen in the bear market but looking at them in this way shows you those which are out of favour, at a time when equities themselves aren't too popular altogether. In my experience, banks and insurers are usually amongst the biggest sufferers, but equally may well be amongst the leaders in a recovery. But you will need patience.