It’s been a cracking November so far for UK shareholders, as share prices have soared on good news. First, Joe Biden won the White House. Second, Pfizer and BioNTech last week announced a Covid-19 vaccine that’s over 90% effective. Third, Moderna topped this, revealing a vaccine this week with over 94.5% efficacy.
Markets loved this positive news, sending the FTSE 100 soaring almost 815 points (14.6%) so far this month. If this keeps up, it could be a new monthly record in the Footsie’s 36-year life. Likewise, stocks have climbed on the other side of the Atlantic, with the S&P 500 hitting an all-time closing high on Monday and up 11.8% in 2020. Yet cheap shares still lurk in the FTSE 100. Here’s one I admire.
Cheap shares: L&G is a beautiful British business
One reason why the FTSE 100 has grossly underperformed the S&P 500 in recent years is the different composition of these indexes. The S&P 500 is dominated by mega-cap tech stocks with trillion-dollar valuations and fast-growing earnings. Meanwhile, the Footsie is regarded as its poor cousin, packed with the ‘old world’ cheap shares of banks, oil companies, and miners. Yet the UK really punches above its weight in certain industries, most notably in finance. And that’s where one of my favourite companies comes in: Legal & General (LSE: LGEN). L&G has been a great British success story for 184 years and I see no reason for this run to end.
If you’ve lived in the UK for a reasonable time, you’ll know the Legal & General name. The L&G brand is one of the most widely recognised in UK financial services, partly because it’s been around since 1836. Across almost two centuries, L&G has grown to become a UK market leader in protection, savings, and investments. In fact, L&G looks after over £1.1trn on behalf of more than 10m customers worldwide. In addition, L&G underwrites more individual life assurance products than any other UK company. Yet its stock was repeatedly dumped into the ‘cheap shares’ bargain bucket this year.
Covid-19 crushes L&G stock
During the coronavirus-driven meltdown in the spring, L&G’s stock plunged to crazy lows. Having peaked at 318.4p on 14 February, L&G’s share price collapsed to close at 138p on 23 March. Frankly, that price was insane and these cheap shares were the bargain of a lifetime. Thus, L&G duly bounced back, rising to a post-crash high above 252p on 8 June. Then came L&G’s second collapse, as its share price dived to hit 182.35p on 28 October. The very next day, I argued that this was far too cheap for a firm of L&G’s quality.
Since their October lows, L&G’s cheap shares have rocketed like fireworks on Bonfire Night. As I write, they trade at 254.8p, up almost 72.5p (39.7%). That’s a stunning rise of almost two-fifths in just three weeks. Nevertheless, I believe that L&G shares remain undervalued and are among the cheapest quality shares in the FTSE 100. At their current price, shares in this £11.3bn business trade on a lowly price-to-earnings ratio of 8.7 and an earning yield of 11.5%. What’s more, L&G’s dividend yield is a hefty 7%, more than double the 3.2% the FTSE 100 offers.
In summary, L&G is an excellent, high-quality business whose shares are still too cheap. I’d buy them today, ideally inside an ISA, to enjoy decades of tax-free dividends and future capital gains!
