As much as I like exciting growth plays, I do see a place in my portfolio for value stocks. These tend to be established (if rather unexciting) companies that pay healthy dividends during tricky economic times.
Here are three examples I’d be happy to buy today if I had some free cash.
Long-term hold
Insurance and investment manager Legal & General (LSE: LGEN) shares change hands for just seven times earnings. This looks like a bargain to me, even if the economic climate isn’t exactly buoyant right now.
It seems I’m not alone in thinking this. Interestingly, the £15bn-cap was the second most popular buy among investors on Hargreaves Lansdown’s platform last week.
To be clear, this company won’t double in value in a year or so. In fact, the price has barely changed compared to where it was five years ago.
Still, there’s a monster forecast dividend yield of 8.1% (as I type) to compensate for this underperformance. It also helps to justify the higher risk that would come from owning this value stock over a bog-standard FTSE 100 index tracker.
Longer term, Legal & General should benefit from an ageing population looking to get their finances in order for retirement. So reinvesting those dividends back into buying more of its stock could pay off for me handsomely.
Temptingly cheap
Pharma giant GSK (LSE: GSK) is another FTSE 100 member whose valuation looks attractive today. Its shares trade on a price-to-earnings (P/E) ratio of less than 10. That’s a fair bit lower than the five-year average of 13.
Why so cheap, I might ask? Well, having demerged its consumer healthcare business Haleon in 2022, GSK is now free to concentrate on developing its pipeline. However, investors still seem to be sceptical about CEO Emma Walmsley’s ability to deliver.
Sure, getting new treatments approved and on the market is a notoriously challenging and costly endeavour. But I think there are reasons to be optimistic.
Pending full approval in or before May, the company will launch the first approved respiratory syncytial virus (RSV) vaccine in the US later this year. Meanwhile, sales of its Shingrix shingles vaccine continue to go from strength to strength, with China becoming an increasingly important market.
The 4% yield also looks likely to be covered well over twice by expected profit.
Green energy play
A final FTSE 100 business that strikes me as a genuine value stock (as opposed to the dreaded value trap) is miner Anglo American (LSE: AAL). The £38bn-cap produces a whole range of valuable metals, including copper, nickel and iron and has projects all over the world.
Like the other firms mentioned here, Anglo trades on an undemanding valuation. A P/E of eight makes it cheaper to buy than the UK market as a whole, even if it isn’t necessarily the cheapest in its sector. There’s a 5.8% dividend yield in the offing too.
With demand for metals likely to rise substantially over the next few decades in light of the green energy revolution, buying now could prove lucrative in time.
One thing I’d need to remember here is just how volatile metal prices can be. Indeed, Anglo American’s share price has been on a rollercoaster ride over the last year.
So spreading my cash around remains vital.
