With many of the country’s largest companies in its ranks, the FTSE 100 index of leading shares contains some famous blue-chip names. Yet despite that, right now some FTSE 100 shares look cheap to me. Dirt cheap.
In fact, I have been taking advantage of what I see as bargain basement prices relative to the firms’ long-term value to buy them for my portfolio.
Investing for the long term
I have bought such shares in the hope that I can hold them for a decade. I might not necessarily do that though — circumstances can change, after all.
But in general, if I cannot buy and hold a share for the long term, I will not buy it. If fact, legendary investor Warren Buffett says that if you cannot imagine holding a share for 10 years, you should not even consider owning it for 10 minutes.
The argument for long-term investing is simple. If a company has a strong underlying business and bright prospects, hopefully over time it will grow its profits.
Legal & General
One of the FTSE 100 shares I have bought this year I feel illustrates the point.
Legal & General (LSE: LGEN) is a household name. it has a well-known logo and name, large customer base and well over a century’s worth of experience in its line of business.
But it is not standing still. The firm has refocused its business over the past decade or so. It has also made big strides into social investing to try and appeal to a younger demographic as its current customer base ages.
Looking at the firm’s valuation, it has a low price-to-earnings ratio of around 6. Yet it is consistently profitable. Last year, for example, post-tax earnings came in at £2.3bn. Despite that, the company is valued at under £13bn.
Not only does the business look cheap, it also offers a dividend yield of over 9%. Is the apparently dirt cheap valuation and high yield a warning signal?
After all, the business faces risks including choppy financial markets leading customers to withdraw funds. I do recognise such risks. Over the past five years, this FTSE 100 share has moved down (by 15%), not up.
But I see that as a buying opportunity for me, given my long-term outlook.
I also see risks in another FTSE 100 share I bought this year, Vodafone (LSE: VOD). It has a lot of debt and that could eat into its wiggle room for paying dividends. It has cut its payout before and could do so again.
That risk kept me away from the shares for a while. However, in the end I bought. So what changed?
Vodafone has been reducing its debt, which I see as a positive move. But the main catalyst for my purchase was valuation.
After falling 38% in the past year (and 56% over five years), I think the price looks cheap, even after considering the risks. Vodafone has a well-known brand, leading position in many markets, and vast customer base.
A yield close to 11% means that, even if the dividend is cut, it could still be substantial.