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VALUE INVESTING
By
Every few months, I take a mechanical look at value in the FTSE 100 index. Relative value will always exist in the sense that you can rank shares on fundamental ratios, which will produce some at the cheap end of the resulting spectrum. However, readers will need to look further as database searches should be only a starting point. The information I used for book values is based on the last annual accounts for asset values with no updates for interims or news since, so consequently it may be out of date. P/Es and yields are consensus analysts' forecasts.
Five Lowest P/E
Recent price
P/E
Old Mutual (LSE: OML)
96p
7.4
Royal & Sun (LSE: RSA)
80p
7.8
Aviva (LSE: AV.)
517p
8.7
HBOS (LSE: HBOS)
708p
8.7
Bradford & Bingley (LSE: BB.)
273p
8.8
| Five Highest Yield | Recent price | Yield % |
|---|---|---|
| United Utilities (LSE: UU.) | 548p | 8.2 |
| Lloyds TSB (LSE: LLOY) | 420p | 8.1 |
| Bradford & Bingley (LSE: BB.) | 273p | 6.5 |
| Alliance & Leicester (LSE: AL.) | 821p | 6.0 |
| BT Group (LSE: BT.A) | 173p | 6.0 |
| Five Lowest P/TBV | Recent price | P/TBV |
|---|---|---|
| British Land (LSE: BLND) | 635p | 0.74 |
| Liberty International (LSE: LII) | 731p | 0.82 |
| Royal & Sun (LSE: RSA) | 80p | 0.82 |
| Land Securities (LSE: LAND) | 1,080p | 0.92 |
| Sainsbury (LSE: SBRY) | 271p | 1.10 |
We're looking for shares that appear in all three lists for maximum value indication but this time there are none. There are two twos though, being Royal & SunAlliance and Bradford & Bingley. Which of these can be considered the more attractive depends on the weight you attach to each list. Although both companies figures amongst the low P/Es, Royal's other appearance is as a low P/TBV while Bradford makes it as a high yielder.
The obvious comment on the low P/E list is that all five are financials with three insurers and two banks. This tells you something about the market's view of these sectors at present. There are always sectors that are either in or out of fashion at any point and this sort of simple analysis indicates those that, for some reason, the market does not fancy at this time. That is not the same as saying they are not desirable, value players seek precisely that which is not fancied yet has a lot of fundamental attraction.
The high yield list contains old favourites such as United Utilities and Lloyds TSB, which have long appeared amongst the highest yielders in the market. Last time I did this review, in February, there were three utilities but now only United remains. Three banks and BT make up the rest of the list. United has risen quite strongly in recent months by utility standards - it was 482p in my February article - but still remains the highest yielder in the FTSE100, which tells you something about how high its yield must have been before. With both United and Lloyds, repeated gossip over years about dividend cuts has failed to materialise - so far anyway. Indeed, United has actually been increasing its dividend by small amounts on a regular basis.
Bradford & Bingley and Alliance & Leicester, both mortgage banks, are probably rated cheaply on a yield basis in the belief that the property market is overdue for a collapse, which will definitely cause a slump in mortgage lending and possibly substantial bad debts. We've been hearing for years about this collapse but, as usual, the earliest callers of major moves are always wrong. Booms and busts always continue for much longer than many commentators suggest. I too believe that sooner or later something will happen but I don't know when and I don't know the scale of it - whether soft landing or crash. Meanwhile, A&L in particular has a superb record of dividend growth, though this could stagnate or be cut in the event of serious mortgage trouble.
Finally, the low P/TBV list shows the usual crop of property companies that traditionally trade below book, together with that other traditional below-booker, Royal & Sun, which incidentally released some half-decent first-quarter figures this week. Sainsbury appears at just over 1, pretty low for a major retailer but then the whole sector is not too popular right now following poor results from some of the major chains. I can't help but notice that someone has been building up a stake in Sainsbury, but you should never buy a share on bid hopes alone.
Stephen owns shares in Alliance & Leicester, Lloyds TSB, J Sainsbury and United Utilities.