Despite reaching a record high on 7 May, I believe the FTSE 100 remains undervalued. I think this is borne out by a comparison of UK equities with those in Europe and North America.
The MSCI United Kingdom index contains mainly Footsie companies and — using three common valuation measures — implies they’re cheap compared to their international peers (see table).
| Index | Forward price-to-earnings ratio | Dividend yield | Price to book ratio |
|---|---|---|---|
| MSCI United Kingdom | 11.5 | 3.7 | 1.9 |
| MSCI Europe (excluding United Kingdom) | 14.1 | 3.0 | 2.2 |
| MSCI North America | 19.9 | 1.5 | 4.4 |
In my opinion, further evidence of the excellent value UK stocks currently offer can be found in recent approaches to buy some of the country’s largest listed companies.
Although there are many reasons why one company might want to buy another — growth, access to new markets and cost savings through economies of scale — none make commercial sense if the target is expensive.
Therefore, the fundamental driver of any deal is the acquirer getting what it wants at a reasonable price. And attractive valuations appears to be the main reason behind some recent takeover activity.
Battle of the giants
BHP is seeking to buy Anglo American (LSE:AAL) because it wants to control its copper mines in Chile and Peru. But the FTSE 100 mining giant has turned down three approaches from its larger Australian rival.
The proposed deal is a complicated one requiring the disposal of Anglo American’s platinum and iron ore businesses. The board has warned that the entire process is likely to take 18 months and says it “carries significant execution and completion risks relating to both value and time”.
According to BHP, its “final offer” values the company at £31.11 a share. Anglo American’s board it being more creative saying that it equates to ‘only’ £29.34. However, this is based on the company’s share price before the first offer was made.
Investors don’t appear to believe either figure. Its shares closed on 24 May at £26.15.
As a shareholder, I have a vested interest.
I bought shares in Anglo American fully understanding the risks associated with investing in mining stocks.
Volatile commodity prices, uncertain earnings and political instability are just three of the risks that mean investors often avoid the sector. And ethical investors wouldn’t touch the industry with a bargepole.
But the company has enormous reserves of precious metals, particularly copper. This commodity is essential if the world is to successfully transition to net zero.
And I think the BHP takeover approach supports my view that the stock is undervalued, like others in the FTSE 100.
Industry consolidation
In April, DS Smith, the packaging company, agreed a deal with International Paper Company valuing it at £5.8bn. That’s 30% more than its market cap before details of the approach were released. The valuation was helped by Mondi starting a bidding war by launching its own takeover attempt for the company.
In the same month, cybersecurity firm, Darktrace, was taken private at a value of £4.3bn. That was 44% higher than the company’s average stock market valuation in the three months prior to the deal.
In February, Barratt Developments announced plans to buy Redrow, a fellow housebuilder, at a 27% premium to its pre-announcement valuation. The deal is currently being investigated by the UK’s competition authority.
However, although interesting, takeover activity can be a distraction. I try to ignore speculation about possible deals. Instead, I buy what I perceive to be undervalued shares and hold them for the long term.
