2 FTSE 100 value stocks that could fund your retirement

These two stocks are great value picks in the high-flying FTSE 100 (INDEXFTSE: UKX), says G A Chester.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 continues to fly high above the 7,000 level but a number of stocks still show classic value characteristics of low earnings multiples and high dividend yields.

Today, I’m looking at two companies that I believe could reward value investors handsomely in the coming years.

Big re-rating potential

I’ve been mightily impressed by the progress made by Aviva (LSE: AV) since Mark Wilson was brought in as chief executive in 2013. I like the group’s diversification across life insurance, general insurance and asset management and the geographical spread of its operations. Most of all, I like the way Mr Wilson is running the businesses with a focus firmly on cash flows and shareholder returns.

Aviva’s progress has been such that it now has a strong regulatory Solvency II ratio and the capacity to deploy surplus capital. This will allow investment in organic growth and bolt-on acquisitions, as well as extra returns to shareholders, on top of a progressive dividend.

Analysts at Credit Suisse reckon Aviva has a sector-leading operating free cash flow yield and that management could surprise with a special dividend of 16p as early as this year. The possibility of this may be increased after Aviva announced today a £403m sale of some of its joint-venture stakes in Spain. The transaction, which is expected to complete later this year, will increase Aviva’s Solvency II capital surplus by about £130m.

The City consensus ordinary dividend forecast for 2017 is 25.9p a share, giving a yield of 4.8% at a current share price of 540p. That’s attractive enough, but a 16p special dividend would take the yield to 7.8%. Meanwhile, the forward price-to-earnings (P/E) ratio is an undemanding 10.8.

I fully expect the market to warm to Aviva’s cash generation and push the shares up to give a more normal earnings multiple and yield. For example, the long-term average forward P/E of the FTSE 100 is around 14. If Aviva were to trade on that multiple, its share price would have to rise to 700p. This would also bring the forward yield on its ordinary dividend in line with the market-average 3.7%. Such a rise in the shares would appear justified to me and I believe they offer excellent value at 540p.

More opportunity than threat

Energy utility SSE (LSE: SSE) is another stock currently boasting strong value credentials, helped by a depressed share price since Theresa May’s plans to cap standard variable energy tariffs were first aired last month.

Historically, regulated utilities — both energy and water — have faced bouts of government meddling but suffered no long-lasting damage. As such, I see this latest instance of populist politicking as more of an opportunity than a threat, as far as investors are concerned.

SSE is forecast to report earnings per share of close to 122p and to declare a dividend of 91.4p when it announces its annual results next week. At a current share price of around 1,450p, this gives a P/E of under 12 and a dividend yield of 6.3%.

SSE’s earnings growth isn’t forecast to be quite as strong as Aviva’s over the next few years, although I still see scope for the shares to re-rate higher to a degree. The combination of earnings growth, the potential for a modest re-rating and a generous dividend lead me to believe that SSE is another attractive value stock to buy today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

The Meta share price falls 10% on weak Q2 guidance — should investors consider buying?

The Meta Platforms' share price is down 10% after the company reported Q1 earnings per share growth of 117%. Does…

Read more »

Investing Articles

This FTSE 250 defence stock looks like a hidden growth gem to me

With countries hiking defence spending as the world grows more insecure, this FTSE 250 firm has seen surging orders and…

Read more »

Bronze bull and bear figurines
Investing Articles

1 hidden dividend superstar I’d buy over Lloyds shares right now

My stock screener flagged that I should sell my Lloyds shares and buy more Phoenix Group Holdings for three key…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

A solid track record and 5.4% yield, this is my top dividend stock pick for May

A great dividend stock is about more than its yield. When hunting for dividend heroes, I look at several metrics…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£8k in savings? Here’s how I’d aim to retire with an annual passive income of £30,000

Getting old needn't be a struggle. Even with a small pot of savings, it's possible to build up a decent…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Down 50% in a year! Are the FTSE’s 2 worst performers the best shares to buy today?

Harvey Jones is looking for the best shares to buy for his portfolio today and wonders whether these two FTSE…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Is FTSE 8,000+ the turning point for UK shares?

On Tuesday 23 April, the FTSE 100 hit a new record high, in a St George's Day celebration. But I…

Read more »

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »