VALUE INVESTING
FTSE 100 Value

By Stephen Bland (TMFPyad)
February 14, 2003

In the search for value, it is useful from time to time to take a look at the hundred largest capitalised companies in the UK, as indicated by the constituents of the FTSE 100 index. I write this review at irregular intervals and perhaps now is an interesting time, in view of the depths to which the index has sunk. As usual, I'll filter the companies using three popular fundamental ratios, namely P/E, P/TBV and Yield.

It should also be noted that these trawls are entirely mechanical, taken from a database. The one I used shows book values based on the last annual accounts, with no update for interims or news since, while EPS and dividends are consensus forecasts. Value trawls are normally used as a starting point to create a short list for further research.

Note also that the index constituents are revised quarterly, so changing market values inevitably cause a few companies to drop out, while new ones are brought in to replace them.

Ten Lowest P/Es

Royal & SunAlliance (LSE: RSA)      3.4
BAE Systems (LSE: BA.)              5.8
Old Mutual (LSE: OML)               6.1
Invensys (LSE: ISYS)                6.3
Hanson (LSE: HNS)                   6.8
Rolls-Royce (LSE: RR.)              6.8
Aviva (LSE: AV.)                    7.0
GKN (LSE: GKN)                      7.3
Abbey National (LSE: ANL)           7.3
ICI (LSE: ICI)                      7.4

Ten Highest Yields

Royal & SunAlliance (LSE: RSA)     10.5
Rolls-Royce (LSE: RR.)              9.8
Scottish & Newcastle (LSE: SCTN)    8.9
BAE Systems (LSE: BA.)              8.9
Lloyds TSB (LSE: LLOY)              8.6
United Utilities (LSE: UU.)         8.1
Friends Provident (LSE: FP.)        8.0
Dixons (LSE: DXNS)                  7.3
Abbey National (LSE: ANL)           7.2
Prudential (LSE: PRU)               7.0

Ten Lowest P/TBVs

Royal & SunAlliance (LSE: RSA)      0.4
British Land (LSE: BLND)            0.5
British Airways (LSE: BAY)          0.6
Liberty Int'l (LSE: LII)            0.7
Land Securities (LSE: LAND)         0.7
Canary Wharf (LSE: CWG)             0.8
Friends Provident (LSE: FP.)        0.8
Whitbread (LSE: WTB)                0.8
Six Continents (LSE: SXC)           0.9
Aviva (LSE: AV.)                    0.9

We are looking for appearances in all three tables: only one share achieves this, Royal & Sun. Not only does it appear in all three, it actually tops all three. It's possibly the first time since I have been carrying out this exercise that this has occurred (though I haven't checked back). Be warned that Royal & Sun's EPS and dividend forecasts are all over the place, so the figures are particularly suspect. We'll know the actual numbers for 2002 within the next few weeks.

The low P/TBV table includes the usual selection of property companies. As these nearly always trade below book in any case, it is not a particular value feature for this sector. The way to find value in the property sector is to use an initial trawl to look for an excessive discount to book, compared with the sector average at the time. You should then look for very low gearing against the sector, as most property shares carry very high debt levels.

Hotel shares like Six Continents also figure in low P/TBV tables. Such shares are often being seen as quasi-property companies, particularly in poor times.

Three insurers figure in all three tables, though not the same ones (apart from Royal), indicating how lowly this sector is rated right now. Insurers are a geared play on the market, so this is not surprising. This sector is probably quite a good bet for those with the patience to hang around for a bit - an important trait for value investors - and will likely show dramatic market-beating form when the market itself recovers.

We have heard repeatedly that an insurer may go bust if the market were to fall a lot further - not necessarily a quoted one though, it could be one of the mutuals. Related financial shares, i.e. banks, feature in the P/E and yield tables, and are also likely to outpace the market in any recovery, in my view.

Engineering companies also put up a strong showing in the Footsie value league, with Invensys, GKN, Rolls-Royce and BAE featuring. I don't like these shares much at the moment and can't see any reason why they should beat the market in a recovery, unlike the financial shares mentioned above.

What are noticeable by their absence are utility shares. We have only one, United, in the yield list. In the past, several have appeared, but the yields of some other shares have risen by so much (as their share prices have fallen), that utilities have been left behind. This shows how low the market has become when utilities, traditionally among the top of the yield list, hardly figure at all.

Less experienced readers looking for income should be aware that forecast yields may never materialise if companies cut their dividends. This is always a risk to be borne in mind when considering yield data.

The author owns shares in Royal & SunAlliance & Lloyds TSB.