The 2020 stock market crash has wiped billions from the value of leading companies in the FTSE 100. As a result of the widespread plunge in share prices, many stocks are trading below their average historic valuations and some look like bargains to me.
British American Tobacco
Speaking of which, shares in British American Tobacco (LSE: BATS) looks ridiculously cheap in my eyes. The industry titan confirmed at the end of last month that it was sticking to its dividend policy thanks to solid predicted earnings growth for 2020.
This year, management expects revenue growth to be between 3% and 5%. Additionally, I’m impressed by the group’s intentions to increase margins, convert 90% of operating profit into cash flow and pay out 65% of underlying earnings per share as a dividend.
Considering the company currently boasts a yield of around 6.8% and has had a strong start to the year, it’s bewildering that the shares are still down by 8% since mid-February. In my view, the stock looks oversold.
I think shares in British American Tobacco are great value, as evidenced by a P/E ratio of just 9.2. I expect investors could be rewarded with attractive returns in the long run, driven by the company’s significant exposure to lucrative opportunities in emerging markets and a consolidation of its dominant market position in the developed world. As such, I rate this insanely cheap UK stock a strong buy.
Cheap UK telecoms share
Last week, telecoms giant BT (LSE: BT-A) decided to suspend its final dividend. This comes as no surprise given underlying full-year revenue fell by 3%. What’s more, the group has a list of projects of the horizon that will require considerable sums of cash: namely, investment opportunities in full fibre broadband and the roll-out of 5G in the UK. When the company resumes dividend payments next year, it will be at half the current rate. That’s bad news for investors who were chasing that 14% yield.
Inevitably, there will be an impact to business arising from Covid-19. The company expects lower BT Sport revenues and roaming charges as a result of the pandemic. That said, I think the group’s other key drivers of revenue should hold up well. After all, those working from home rely on broadband and their phones.
Good news came for investors on Friday when the group announced plans to sell its multibillion-pound stake in its Openreach infrastructure division. An article in The Financial Times detailed that the move would “bankroll a £12bn upgrade of Britain’s broadband network and boost the telecom group’s flagging share price”. After BT’s market capitalisation sank to its lowest level since 2009 on Thursday, investors witnessed the group’s share price rocketing in early Friday morning trading.
Ultimately, a P/E ratio of around 4.5 indicates there’s still significant value. Over the long term, the sale of the group’s Openreach stake could be a catalyst for a further rise in the company’s share price. Moreover, moving customers onto the new 5G and full fibre networks could provide an avenue for growth in the long run.
