VALUE INVESTING
FTSE 100 Value

By Stephen Bland (TMFPyad)
February 6, 2004

From time to time I do a trawl for value in this index for those readers interested in very large cap shares. Note that my trawl is wholly mechanical and thus makes no comment about the underlying qualities of the shares or their likelihood of doing well in future. It is purely a fundamental filter operation.

The database I use is based on the last annual accounts with no updates for interims or news since. It may therefore be out of date in some cases. Eps and dividends and consequently P/Es and yields are consensus analysts' forecasts. Anyone interested will have to do further research but this makes a good starting point.

Five Lowest P/E              Recent price       P/E                          
Old Mutual (LSE: OML)              93           6.8
Royal & Sun (LSE: RSA)             96           7.3
United Utilities (LSE: UU.)       482           8.9
HBOS (LSE: HBOS)                  721           9.3
BAE Systems (LSE: BA.)            162           9.4

Five Highest Yield                          % Yield
United Utilities (LSE: UU.)       482           9.3
Lloyds TSB (LSE: LLOY)            452           7.5
Severn Trent (LSE: SVT)           719           6.7
Scottish & Southern (LSE: SSE)    654           6.0
Sainsbury (LSE: SBRY)             287           5.8

Five Lowest P/TBV                             P/TBV
Royal & Sun (LSE: RSA)             96           0.7
British Land (LSE: BLND)          596           0.7
Liberty Int (LSE: LII)            665           0.8
Land Secs (LSE: LAND)            1040           0.9
Sainsbury (LSE: SBRY)             287           1.2

We're looking for any shares that appear in all three lists. There aren't any this time. There are though three twos being Royal&Sun, United Utilities and Sainsbury. Which of these can be considered the better value depends on the emphasis you place upon the different criteria.

Unsurprisingly, the low P/TBV list contains three property companies. These traditionally trade below book. It is in the degree of discount from book that value may be found. Land Securities has seen a dramatic narrowing of its discount in recent times and as a result has been a good investment. But now it is trading only slightly below book and is no longer that good value for a property share.

Also in the low P/TBV list is general insurer Royal&Sun, a company about which I have written in my new value newsletter. It has been below book for a long time now owing to its well publicised difficulties. It appears too in the low P/E list, but the quality of eps from this company is, I'd say, questionable. Essentially, it is just an asset play in my view and one that is more than usually speculative.

An interesting share here is Sainsbury. Although it figures in the low P/TBV list, it trades over book so does not demonstrate deep value on that measure. However, it is also amongst the high yielders, adding some support to the price assuming of course that dividends are maintained.

I don't like Sainsbury for the good value reason that my dad used to hate them on political grounds. He died a long time ago now but, always ready for a laugh, I remember him telling me about a time when he was in a branch and stuck to the floor owing to something nasty having been spilled. He was always overjoyed that Tesco (LSE: TSCO), then an upstart operation, eventually wiped the floor with them – which is one reason why Sainsbury is now trading in FTSE100 value territory. Anyway, as often happens with blue chip value, sooner or later someone might shake them up in some way outing the value. However as with all value trades, patience will be needed.

Some of the high yielders look interesting. There are three utilities which is normal, they traditionally run very high yields, but we have Lloyds TSB there too. as well as the aforementioned Sainsbury. Surprisingly to some perhaps, one of our top banks is rated amongst the highest yielders in the whole market. Although this situation has prevailed for some time now, it cannot continue indefinitely. The yield is almost certain to fall in due course to a more average level, though this could be by way of a dividend cut rather than a large price rise. Encouragingly, nearly all recent analysts' forecasts since the company's satisfactory trading update statement in December are negative on Lloyds.

Amongst the low P/Es we have, interestingly, three financials, being two insurers and a bank. As I said earlier though, the eps of Royal is unreliable. United offers a low P/E in addition to its very high yield, but is highly geared as are many utilities. The interesting thing about United is its quite successful non-regulated businesses. As for BAE, I don't like it much. Companies engaged in defence work and the like are very risky.

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The author owns Lloyds TSB shares.