VALUE INVESTING
FTSE 100 Value

By Stephen Bland (TMFPyad)
May 23, 2003

Time to take a look again at what value may be lurking in our hundred largest companies. I last did this exercise about three months ago. As the index is amended quarterly for promotions and relegations, there have been changes to the constituents in addition to the shifting vagaries of the market.

Interestingly, the sole share appearing in all three value filters last time, Royal and SunAlliance (LSE: RSA)(NYSE: RSA), was ejected from the FTSE at the last review. In fact, it not only appeared on all three lists but appeared at the top of all of them. However, since my last article on this subject RSA has done quite well in the market recovery. That's a demonstration for those who think that dismissal from the index is a bad thing for a share price (and vice versa) that such an effect often does not exist in practice.

If anything there is often a contrarian tendency with such shares, presumably because too many naïve investors believe, wrongly, that joining or leaving the index is good or bad due to supposed index fund influence. In practice, any index fund trading is too insignificant to make any difference in the light of all the other influences on a share price.

The lists below are produced mechanically from a database. They're just a starting point for value investors, and further research is required before any purchase can be considered. Price earning ratios (p/e) and dividend yields are based on consensus forecasts. Note that book values are based on the last annual accounts with no update for recent news or interims. Consequently, some of the figures may be seriously out of date. Readers should also note that databases sometimes have a few errors in them.

Ten lowest P/E 
Old Mutual (LSE:OML)                     6.9
ICI (LSE:ICI)                            7.6
BAE Systems (LSE:BA.)                    7.6
Hanson (LSE:HNS)                         7.7
Aviva (LSE:AV.)                          8.4
GKN (LSE:GKN)                            8.6
Lloyds TSB (LSE:LLOY)                    9.1
Friends Provident (LSE:FP.)              9.1
BA Tobacco (LSE:BATS)                    9.2
Prudential (LSE:PRU)                     9.7

Ten highest yield                          % 
Lloyds TSB (LSE:LLOY)                    8.4
United Utilities (LSE:UU.)               8.0
BAE Systems (LSE:BA.)                    7.4
Friends Provident (LSE:FP.)              7.2
Severn Trent (LSE:SVT)                   6.5
Hays (LSE:HAS)                           6.5
Sainsbury (LSE:SBRY)                     6.4
Reuters (LSE:RTR)                        6.3
Kelda (LSE:KEL)                          6.3
Old Mutual (LSE:OML)                     6.1

Ten lowest P/TBV 
Cable & Wireless (LSE:CW.)               0.4
British Land (LSE:BLND)                  0.6
Mitchells & Butlers (LSE:MAB)            0.7
Land Securities (LSE:LAND)               0.7
Liberty International (LSE:LII)          0.7
BHP Billiton (LSE:BLT)                   1.0
Xstrata (LSE:XTA)                        1.0
Sainsbury (LSE:SBRY)                     1.1
Whitbread (LSE:WTB)                      1.1
Kelda (LSE:KEL)                          1.1

What we're looking for is repeat appearances in these lists. No company makes it into all three this time but there are a number that appear in two.  Depending upon which of these value filters you place the most emphasis you can look at it in several ways.

For example, if assets are your thing, then two companies appear both here and in the yield rankings - Sainsbury and Kelda. None of the low P/TBV shares appear in the low P/E list. If though you really get off on low P/E, then there are four shares in this list and also in the yield list - Old Mutual, BAE, Lloyds and the nomenologically nauseating Friends. Two of these are insurers.

These lists are useful also for seeing sector trends relative to the market. For example in the P/TBV table there are, perhaps surprisingly, two miners - BHP Billiton and Xstrata. There were no mining shares last time, so that tells you something about what is happening with such shares.

Similarly, the low P/E list contains four insurers and the yield list two, though this has not changed much from last time. The sector is still lowly rated against the market.

The yield list, as usual, has a selection of utilities which virtually always trade on high yields due to the regulation of their primary businesses. The interesting thing continues to be that they are not the highest yields around. Lloyds, though it has recovered well, continues to hold that dubious honour, very likely because a sufficient number of investors believe there will be a dividend cut.

Sectors unfavoured by the market can be a useful starting point for a value search because sometimes the good shares, if you can find any, are marked down with the bad merely for being in the same industry.

The author holds shares in Lloyds and Royal & Sun.