Right now, the FTSE 100 is trading at a price-to-earnings (P/E) ratio of around 10. By contrast, the S&P 500 is trading at a 13 P/E multiple.
That makes the UK index look cheap compared to its US counterpart. But could it be a good investment for me?
Historic returns
Over the last half-decade, the FTSE 100 has had some impressive years. The index produced a total return of 17.3% in 2019 and 18.4% in 2021.
Other times, though, the returns have faltered. The index lost 8.7% in 2018 and 11.5% in 2020.
Overall, the average annual return has been just under 6%. That includes both the increase in the level of the index and the dividends paid to investors.
Compounding a £1,000 investment at 6% per year since the start of 2020 would have given me an investment worth £1,191 today. And if I left it for 30 years at that rate, it would be worth £5,743.
Intrinsically, I think that’s a reasonable return. But it’s some way short of the S&P 500, which has averaged around 23% over the same time period.
While the UK index has lagged its US counterpart in terms of total return, I think that there are some really outstanding FTSE 100 stocks. I’m looking to invest in these in my portfolio.
FTSE 100 stocks
Instead of investing in the FTSE 100, I’m looking at some individual stocks that have produced stellar results. In particular, two stocks stand out to me for my portfolio.
The first is Experian. Over the last five years, the share price has increased by an average of 11.46% per year. This means that a £1,000 investment five years ago would be worth £1,720 today even before considering dividends.
Another is Halma. Shares in Halma have gone up by 12.22% annually since 2017. As a result, a £1,000 investment five years ago would be worth over £1,780 today.
In my view, the reason that these stocks have outperformed the FTSE 100 is straightforward. They have increased their earnings per share.
Experian has grown its earnings per share by 11.42% per year on average recently. The stock has gone up by an average of 11.46% each year as a result.
Earnings at Halma have increased by 12.13% annually on average. As a result, the stock has gone up by 12.22% per year.
In other words, shares of both Experian and Halma have increased in line with their earnings growth. If earnings growth slows down, then there’s a risk that either stock might underperform in future.
Both businesses, however, look strong to me. I own both in my portfolio at the moment.
I think that they can continue to grow their earnings faster than the FTSE 100. As a result, I’m looking to add to my investment in both stocks at today’s prices.
