While rummaging through some old paperwork recently, I found a long-forgotten, dormant investment account. (Maybe when I changed address, I forgot to tell this provider?) Thanks to this fortunate find, I have roughly £1,000 to invest. Yesterday, I explained that, in a bubble of everything, I see cheap UK shares as a relative safe haven. Hence, my goal is to keep investing spare cash into low-priced British businesses.
When looking for cheap UK shares, I seek four things. First, firms that are easy to understand and whose workings I could explain to a bright child. Second, I like to invest in companies that lead their fields, because I don’t want to back also-rans. Third, they should generate substantial cash flows, profits, earnings per share, and cash dividends. Fourth, their shares should be trading at attractive levels with plenty of headroom for future returns.
Here are two cheap stocks that really fit my bill today. I don’t own either share at present, but I’d happily buy both at prevailing prices.
Cheap UK share #1: BHP Group
The first of my cheap UK shares is BHP Group (LSE: BHP), the world’s largest mining group. It digs up and sells iron ore, metallurgical coal, and energy coal, and produces oil and gas. This Anglo-Australian firm’s origins date back to 1860, when subsidiary Billiton was founded. The firm is dual-listed in London and Sydney (but may move its primary market listing to Australia). At its current share price of 2,099.5p, BHP’s shares are valued at £110.7bn, making it a super-heavyweight member of the FTSE 100 index.
But why is this such a cheap UK share? First, environmental investors largely steer clear of BHP, because mining is a mucky business. Second, the UK stock market has been unloved and overlooked for years, partly because of our Brexit struggles. Third, BHP’s stock has dropped back from its 52-week high of 2,505p on 17 August, after a huge dividend was subtracted from its share price. Today BHP stock trades on a price-to-earnings ratio of 12.9 and an earnings yield of 7.7%. Temptingly, it offers a high dividend yield of 10.1% a year — almost three times the FTSE 100’s forecast 3.7%. However, mining is a cyclical business and BHP cut its dividend in 2016 and 2020, so this cash pay-out is by no means guaranteed.[fool_stock_chart ticker=LSE:BHP]
Low-priced stock #2: Legal & General
While working in the financial world from 1987 to 2002, I developed a healthy respect for Legal & General (LSE: LGEN). L&G is one of the UK’s leading provider of life assurance, savings, and investments. It’s also a household name, having been founded in 1836. After 185 years in business, L&G manages over a trillion pounds of wealth for more than 10m customers. But its stock is up only 3.3% in 2021, so I see it as another cheap UK share.
As I write, LGEN trades at 275p, valuing the group at £16.4bn. Today, this cheap UK share trades on a price-to-earnings ratio of 7.2 and an earnings yield of 13.8%. In addition, it offers a market-beating dividend yield of 6.5% a year. Even during 2020’s Covid-19 crisis, L&G lifted its dividend, showing its financial strength. I’m a long-term admirer of L&G, but it faces heightened competition for new customers, particularly from huge US rivals. Even so, I’d still buy this FTSE 100 stock!