When I’m looking for long-term FTSE 100 shares in which to invest my hard-earned cash, I’m looking for three simple things: profits, quality and a bargain price.
I follow the Warren Buffett’s advice that “whether I’m buying socks or stocks, I like buying quality merchandise when it’s marked down.“
So what does this actually mean?
Good FTSE 100 shares to buy
I like buying profitable companies. Especially when I’m looking to buy and hold for years.
Unprofitable companies are always higher risk. Yes, they could make profits in future, but nothing is certain in life, and certainly not on stock markets!
Quality, to me, means companies that make good returns on the capital they spend. I look for FTSE 100 companies that sell high-margin products. Insurance companies tend to make solid, long-term profits as customers will often stay for years. That’s why Aviva (LSE:AV) is right at the top of my list.
Bargain prices appear for FTSE 100 shares when the market incorrectly undervalues a company. This happens much more often than you might think.
A lot of people on stock markets are looking to make quick money. So they only look at very short-term news. By taking a much longer-term view on a company’s profits and quality, we can take advantage of bargain prices.
Aviva
We need only look back a couple of years to explain just how cheap Aviva shares are today. In 2016 the Aviva P/E ratio was 28.7. So you’d pay £28.70 for every £1 of profit Aviva made. Today it’s just 4.2!
In normal times I would find such a low rating troubling. But there are some seismic changes going on at Aviva and it’s on sale today at a tremendous discount.
New CEO Amanda Blanc is moving to complete what predecessor Maurice Tulloch failed to do. That is, cutting debt by selling off its underperforming French arm to insurer Allianz, selling its majority stake in its Singapore business for £1.6bn and refocusing on building profits back stronger in its main UK, Irish and Canadian markets.
Blanc has shown admirable desire to push the business forward.
“For too long [efficient use of capital] has proven elusive,” she warned. “Meaningful change is required. We have a long road ahead and much work to do.“
Adding Jim McConville and Mohit Joshi as a non-exec directors in October 2020 is one of those moves I like. Joshi is president of Indian IT giant Infosys while McConville brings years of banking experience from Lloyds.
Why now?
There are profits, quality and a bargain price here. I like the fact that Blanc has snapped up 324,887 shares in her own business as recently as September 2020 — a huge sign of confidence in the future direction of the company.
She also made the hugely welcome move to reinstate Aviva’s dividend in August. I see today’s 3.42% yield rising back to 5% or 6% in future as Blanc’s cost-cutting and profit drives come to fruition.
The Aviva share price has gained 20% since March, a steady but not spectacular rise. So now could be a solid time to buy-in to grab value.
Remember Warren Buffett’s mantra that “Price is what you pay. Value is what you get.” His point is that the market can either incorrectly undervalue a company or vastly overvalue it. Aviva looks undervalued to me and that’s why I’d buy today.
