Two cheap UK shares to buy now

I think investing in cheap UK shares is the best way of putting my spare cash to work. But what is the best way of finding value investments?

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There has been a lot of volatility in the FTSE indices this year. And as a result, I think there are plenty of cheap UK shares out there that can provide me with high-quality returns over the long term.

I start by looking at three key metrics when considering whether a company is a good investment. Profitability, dividend yield and share price. Simplistically, if a profitable business that pays out dividends is trading at a cheap price, then there’s a good chance I might get some value out of it.

I’m always looking to hold for the long term, so considering the business’s viability for a successful future is also important to me.

I’ve picked out two companies that I think represent a good investment today.

Vodafone

Currently trading at 116p, the Vodafone (LSE: VOD) share price has mostly been trending downwards recently. It’s down 5% over the last year, but has dropped almost 10% in the last month!

The telecoms juggernaut has recently returned to profitability, posting a net profit of over £2bn in 2022. This has followed on from loss-making financial years 2019 and 2020, and a small profit in 2021. Revenues have been stable over this period at between £43bn and £46bn, whilst expenditure for each year has fluctuated.

When it comes to dividends, Vodafone has consistently paid out, even in loss-making years. The current dividend yield is sitting at 6.5%, which fares very well against the FTSE 100 average of around 4%.

Vodafone announced recently that it will sell its Hungarian business operations. The deal is expected to bring in £1.5bn with a view of streamlining operations and reducing net debt. I always like signs of a company wanting to streamline, and with inconsistent profitability being my primary concern with this company, I think this is good news.

Taylor Wimpey

Taylor Wimpey (LSE: TW) shares are 111p at the time of writing, an astonishing 38% lower than this time last year!

The building trade is one that sees higher volatility in a wider economic downturn. So perhaps the share price drop isn’t a huge surprise in the context of supply-chain issues, a cost-of-living squeeze and a possible recession on the horizon in the UK.

But I think this company represents excellent value at its current share price.

The housebuilder has consistently recorded profits over the past five years, and recent quarterly figures are showing a net profit margin of 12.5%.

It’s also encouraging to read about Taylor Wimpey’s dividend policy. It states:

“Dividend policy is to return c.7.5% of net assets to shareholders annually.”

Whilst the dividend yield is currently sitting at a healthy 8%, it’s also important to point out that dividend payouts are linked to the “cyclical market” in which Taylor Wimpey operates. We saw this play out during Covid-hit 2020, where no dividend payments were made.

Overall, I think both companies represent great value right now! I will be adding them to my portfolio in the very near future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Yianni has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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