The FTSE 100 is packed with cheap shares at the moment, and I am now drawing up a shortlist of top opportunities.
I have already taken a punt and bought FTSE 100 housebuilder Persimmon, which currently trades at just 4.9 times earnings and yields a ridiculous 19.41%. That dividend looks fragile, as it’s just too big now. But even if it was halved, I’d still get around 10% a year.
Next, I’m looking to buy Rolls-Royce. Its stock has fallen by 75% over the past five years, but I think it should outperform when the recovery comes. Again though, it’s at the risky end of the spectrum.
My target is cheap shares
Once I’ve completed the purchase, I will be gunning to buy more cheap shares. Grocery chain Sainsbury’s (LSE: SBRY) has caught my eye. The stock is really cheap, trading at just seven times earnings. Yet it’s another high-risk play and maybe I’m already taking more than enough chances with my money.
Shoppers are short of cash and looking to cut back whenever they can. In the past, this may have favoured supermarkets, which attract essential rather than discretionary spending. This isn’t the case today, given the squeeze.
Cash-strapped shoppers are trading down on favourite brands, switching to discounters like Aldi and Lidl, or simply going without.
Sainsbury’s is still the UK’s second biggest supermarket, with a market share of 14.7%. However, that is down from 16.6% a decade ago, according to analysts Kantar. Its market share was 14.9% a year ago, so the slide is ongoing.
The grocer will struggle to build its position with its most recent Q1 figures showing underlying sales falling 4%. General merchandise fared worse, unsurprisingly, down 11.2%.
Chief executive Simon Roberts has warned the pressure on household budgets “will only intensify” as inflation hits incomes (and that was before the current crisis). Yet the group still anticipates annual underlying pre-tax profit of £630m-£690m.
Sainsbury’s carries net debt of £6.759bn, which worries me. Management is clearly worried too, as it has been battling to pay it down, with some success. It recently hit its four-year target of reducing net debt by at least £950 million a year ahead of schedule.
I like the Sainsbury’s dividend policy
It did that while maintaining its a “broadly stable dividend”, paying out £1.1bn over five years. This year’s proposed full-year dividend per share of 13.1p is up 24%. That’s the highest since 2015 and will return another £300m of cash to shareholders.
Sainsbury’s currently yields a blockbuster 7.9% with the payout covered 1.9 times by earnings. Despite today’s troubles, the company currently generates the £500m a year in retail free cash flow that it needs to keep the payout affordable. I think this dividend looks more solid than many.
Roberts knows how important the dividend is, given the group’s slim growth prospects. The Sainsbury’s share price is down 38% over a year and 25% over five years. I don’t expect much in the way of share price growth for years, but that dividend swings this for me.
It is probably more solid than Persimmon’s, while Rolls-Royce pays nothing at the moment. I may take a chance and buy Sainsbury’s shares, once I have the cash.
