It seems that some investors may have developed the jitters over the past two weeks. Since Friday, 8 April, the UK’s FTSE 100 index has dropped by over 300 points, losing just over 4% of its value. What’s more, some cheap shares have got a lot cheaper in 2022, thanks to ongoing declines so far this calendar year.
As a veteran value investor, one of my favourite pastimes is to go deep-value hunting, especially among the UK’s large-cap and blue-chip shares. Hence, here are three cheap shares from the FTSE 100 that I don’t own, but would gladly buy at their current price levels.
Three cheap shares from the FTSE 100
| Company | Sector | Share price (p) | Market value (£bn) | P/E | Earnings yield | Dividend yield | Dividend cover |
| Lloyds Banking Group | Bank | 45.8 | 32.6 | 6.1 | 16.3% | 4.4% | 3.7 |
| Rio Tinto | Miner | 5,443.0 | 93.2 | 5.4 | 18.5% | 10.6% | 1.7 |
| Imperial Brands | Tobacco | 1,628.00 | 15.43 | 5.4 | 18.4% | 8.5% | 2.2 |
Why would I buy these three cheap shares today? First, because all three trade on modest earnings multiples. Their price-to-earnings (P/E) ratios range from 5.4 at Rio Tinto and Imperial Brands to just 6.1 at Lloyds Banking Group.
Second, thanks to these lowly ratings, earnings yields from these stocks range from 16.3% at the ‘Black Horse bank’ to 18.5% at global mega-miner Rio Tinto. Third, all three cheap shares offer market-beating dividend yields. These range from 4.4% a year at Lloyds to a juicy 10.6% a year at Rio Tinto (which means ‘red river’ in Spanish).
Of course, future company dividends are not guaranteed. Thus, they can be cut or cancelled at the drop of a hat. Even so, dividends from these three shares are covered between 1.7 and 3.7 times by company earnings. This provides a decent margin of safety in case of earnings decline. It also leaves headroom for future dividend increases — something that can be a major component of future returns.
Why I’d buy all three shares today
Of course, I would never consider creating a portfolio consisting only of three shares, as it would not be properly diversified. Even so, this mini-portfolio of three cheap shares looks attractive to me. All three companies work in widely different industries, so there is little or no overlap between their industries.
Also, the average price-to-earnings ratio of this mini-portfolio is a modest 5.7. This translates into a healthy earnings yield of 17.7% (roughly 2.5 times the FTSE 100’s earnings yield). Lastly, the average dividend yield of 7.8% a year is approaching twice the FTSE 100’s cash yield of roughly 4% a year.
For my family portfolio, I’m always on the lookout for cheap shares offering decent passive income. Ideally, this would be combined with potential for higher future earnings and share-price growth. To me, these three FTSE 100 shares appear to meet my growth and income needs very closely. That’s why I’d happily buy and hold them, perhaps for a decade and more. However, in the short term, I’d be braced for continued price volatility, perhaps fuelled by Covid-19, the Russia/Ukraine war, or a Chinese economic slowdown!
