Shares in British companies, and particularly those on the FTSE 100, look very cheap right now. This means I could see better-than-average returns on my investments. That is, of course, providing valuations return to normal levels. Here’s what I mean.
A great time to buy British shares?
The FTSE 100 forward price-to-earnings ratio stands at just under 11 right now. That’s cheap compared to the 10-year average of 22. For the same earnings, it’s like I’m getting shares for half price.
The UK is looking cheap compared to prominent international indexes as the US S&P 500 has a P/E ratio of roughly 18 and the MSCI World Index stands at around 15.
The Financial Times went so far as to say, “it is embarrassing that the value of UK equities has fallen so far behind that of international peers.”
In other words, the earnings that FTSE 100 companies are posting aren’t reflected in their share prices.
So what does this mean for me? Well, if I bought shares in the right FTSE 100 companies today, I could enjoy superb returns for my portfolio. Here are two I’m looking at.
Pharma giant
One stock that’s caught my eye is GSK (LSE: GSK). The pharmaceutical firm formerly known as GlaxoSmithKline trades at a forward P/E ratio of just 10, and its share price has dipped to levels no higher than they were in 1997.
Why is the share price so low? Well, last year GSK went through a rough period. It started with the spin-off of its consumer healthcare division, a listed company now known as Haleon. And it continued with a lawsuit involving its former Zantac heartburn medication, and also an announcement of a reduced dividend.
Despite the problems, with increased revenue year on year for the better part of a decade, and 60 new drugs in the pipeline, the GSK share price definitely looks to be on the cheaper side. I think I’ll buy some of its shares soon.
Cigarettes on sale?
Cigarette maker British American Tobacco (LSE:BATS) is another business on my watchlist. The company trades at a forward P/E ratio of 8.1 and the share price is down 43% from all-time highs.
This looks cheap by itself, but also looks like a bargain to me when I factor in that BAT offers shareholders a 7.6% annual yield. That’s one of the highest dividends on the FTSE 100 and would offer me automatic cash payments just for holding the stock.
On the other hand, one of the reasons for such high dividends is the cigarette industry’s ‘sin stock’ status. A lot of investors are put off on ethical grounds – breaking ESG standards, as some would call it.
Other investors also likely recognise the risk in holding shares in a company that produces products that might, in the long run, prove unpopular or even be illegal.
In the short term, this stock looks attractive. There are actually more smokers worldwide than ever, and BAT, with its product line of cigarette brands like Dunhill and Lucky Strike, is a truly global business. The long-term outlook for cigarettes does mean this won’t be a buy for me, however.
