The likes of Lloyds, Tesco, BP and Vodafone are popular stocks with private investors.
But today, I’m looking at three less favoured companies of the FTSE 100. I believe all three merit closer inspection by investors, for each has ‘secret’ attractions that may be easily overlooked.
Far from a poor relation
Why invest in the UK’s number four supermarket Morrisons (LSE: MRW) when you can buy king of the sector Tesco?
A strong balance sheet is one of the first things I look for in a prospective investment. Morrisons owns the freehold on 85% of its property and has a pension surplus. Tesco owns the freehold on just 47% of its UK property and has a pension deficit. Factoring in the debt in these areas, Morrisons’ gearing is a fairly conservative 65%, but Tesco’s is a whopping 180%.
Rent and pension obligations don’t just impact on a company’s financial strength, but also cash flows. Morrisons annual rent bill is running at just £119m, but Tesco has cash-flow-corrosive rent costs of £1,296m, as well having to fork out £270m a year to fund its pension deficit.
You get an idea of the benefit to Morrisons by looking at the companies’ latest free cash flow numbers. Tesco, with revenue of £54.4bn, posted free cash flow of £1.09bn. Morrisons posted slightly lower free cash flow of £0.85bn, but that was on revenue of just £16.1bn.
Morrisons is far from the poor relation that its number four position in the market might suggest, and trading on a forward P/E of 19, compared with Tesco’s 24, appears worthy of closer inspection by investors.
A bigger picture
Why invest in Associated British Foods (LSE: ABF) on a forward P/E of 29 when you can buy popular consumer goods powerhouse Unilever on a P/E of 21?
I would say why indeed, but for the fact that ABF is more than a groceries, ingredients, sugar and animal feeds producer. Its biggest business is the mighty Primark. Now, it’s certainly arguable that a P/E of 29 is still way too high, but there is a bigger picture than short-term earnings here.
Primark stores currently number around 300, across 10 territories. This footprint is almost identical to that of H&M two-and-a-bit decades ago. Today, H&M has close to 4,000 stores in over 60 territories. If Primark can be even half as successful as that — and I believe there’s every indication it can — ABF’s current P/E will mean little against the magnitude of returns for investors.
Cheaper than it looks
Why invest in asset manager Schroders (LSE: SDR) on a forward P/E of 15 with a dividend yield of 3.5% when there are any number of blue-chip financials on lower earnings ratings and offering higher yields?
Well, aside from the fact that Schroders has a history stretching back over 200 years, and is a high-quality, conservatively-managed business — there was no dividend cut during the financial crisis, for example — there is an attraction some investors may be unaware of. Schroders has a second class of share: Schroders NV, which has the ticker SDRC. The ‘NV’ stands for non-voting, but apart from the voting rights the two classes of share have the same entitlements.
The NV shares typically trade at a discount, and right now the discount is near to 24%, which is at the wider end of the historical range. The forward P/E on the NV shares is a far more attractive 11.5, and the dividend yield is a superior 4.5%. On this valuation the Schroders NV shares make for an appealing buy, in my view.
