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Why the BAE share price isn’t the only FTSE 100 climber I’d buy today

In December, when its share price was just off a three-year low, I said of BAE Systems (LSE: BA) that “I think I’m looking at a strong buy.” 

Since then, we’ve seen an 11.5% share price recovery, which is ahead of the FTSE 100‘s uptick over the same period. So it looks like the market could finally be taking notice of what I still see as an attractive undervaluation.

Year-on-year earnings will be lumpy. That’s just the nature of businesses based on long-term contracts, but expectations for 2018 and the following two years look unusually smooth — suggesting an overall EPS rise of 11% in three years.

As long as earnings beat inflation over the long term (and I think we could easily see something significantly ahead of inflation over the next ten years), I’m happy.

Progressive dividends

Steadily rising earnings also translate into a progressive dividend, which is currently going just about hand in hand with inflation with rises of around 2.3% per year currently on the cards.

Yields stand at about 4.5%, with cover rising to two times based on 2010 forecasts, and that looks pretty conservative to me too. Perhaps surprisingly, a yield of that level is below the FTSE 100 average these days, with the latest Dividend Dashboard from AJ Bell predicting an overall yield of 4.9% for 2019.

That suggests there are some better dividends out there, and I do think there are. But if you’re looking for a Brexit-safe, long-term investment that’s likely to provide you with reliable dividend income for decades to come, I see BAE shares on P/E multiples of around 11 as a buy.

Another climber

In Ashtead Group (LSE: AHT), I reckon I’m seeing another recovering stock that still has a lot more to give.

Ashtead is up there in the FTSE 100’s top 10 winners of the past month with a price gain of 20% since December, though I still see it as an undervalued pick — this time for its growth prospects.

Ashtead, which is one of the worlds largest equipment rental firms, strikes me as one of those picks and shovels investments — named after the gold rush, whoever finds the gold, those who provide the equipment are on to a good thing.

Now, there is a downside, as such companies can suffer during cyclical downturns. But I think the solution for that is twofold — go for the biggest and best in the sector, and look for share prices with sufficient margin for safety. I see both in Ashtead.

Cracking record

Earnings have been climbing in healthy double digit percentages for the past five years. And though that growth is expected to slow in the next couple of years, I still see a tempting growth valuation — with a P/E of 11, expected to drop to only nine on April 2021 forecasts.

That low valuation is partly due to the share price having shed 30% in the final quarter of 2018, and I see that as down to a key characteristic of growth shares — when a fast growth phase slows, the get-rich-quick contingent bales out.

Dividends are low with yields around 2%, but they’re more than four times covered by earnings and climbing well ahead of inflation. I see a future cash cow here too.

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Alan Oscroft has no position in any of the 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.