The FTSE 100 started 2019 in fine spirits, rising a blistering 14% to peak at 7686 at the end of July. Then came August…
Room for gloom
After falling more than 6% in the last month, investor spirits are down too. I just clicked on a financial website to be greeted with gloomy headlines about UK consumer sentiment dropping to a six-year low, amid rising Brexit concerns.
Britons aren’t the only ones fretting. There’s a reason why the US Federal Reserve cut interest rates in July for the first time in more than a decade. More than 30 central banks around the world have cut rates so far this year.
Many investors fear a turbulent autumn, as the US-China trade war drags on with no apparent strategy behind it, Brexit comes to a head, Europe slows, and the global stimulus loses its purchase.
Buffett knows
There’s plenty to be fearful about, and we all know what billionaire investor Warren Buffett says about that. Many are familiar with his quote that wise investors should be be “fearful when others are greedy and greedy when others are fearful”. The fear factor is currently rising, so you know what that means. Time to get your greed on.
I’ve had a busy week reviewing FTSE 100 stocks and found the same pattern popping up again and again. The index is rammed with stocks trading at low valuations, often 10 times earnings or less, while offering dizzying yields of 6%, 7%, 8%, or even 9%. Direct Line Insurance Group and ITV both fall into that category.
I don’t remember seeing anything like it – except in moments of extreme turbulence, and we’re certainly not in that position yet.
Dividend bargains
Let me pluck out a few examples. Tobacco maker Imperial Brands trades at just 7.7 times earnings and yields a mighty 8.9%. Insurer Aviva is valued at 9.3 times and yields 8.45%. Phoenix Group Holdings trades at 9.5 and yields 7.22%. Persimmon trades at 6.6 and yields an incredible 12.7%. I could go on. And on.
All this is happening when you barely get 1.5% on a Cash ISA, and that could fall if the Bank of England cuts base rates in the event of a no-deal Brexit.
A low valuation and high yield don’t automatically make a winning stock pick. They can often suggest a company in peril, and there’s no guarantee the dividend will last.
No crisis yet
However, a lot of the companies I’ve looked at, including the four mentioned above, don’t look in serious peril to me. Phoenix looks particularly solid. Many continue to post rising sales and profits.
Negative macro-sentiment is the issue here, the “challenging conditions” executives constantly refer to in results. The bull run is long in the tooth, and many think its time is up. Who knows, they might even be right? The problem is people have been predicting its demise for years now but markets have powered on, and companies have kept paying their dividends.
Many of today’s worries now seem to be priced in. The dividends are out there, waiting to be snapped up. Now what did Warren Buffett say again?
