It feels like I’ve been watching the FTSE 100 for years now, thinking it’s undervalued and full of top-quality bargains just getting cheaper. That’s probably because I have, but is the UK’s top index finally heading back in the right direction now?
Since the end of 2018, the FTSE 100 has gained 11%, but some of its possibly most undervalued stocks have risen even further. BP (LSE: BP) shares are up nearly 15% since the New Year, and an oil price that’s been steadily creeping up to break $70 per barrel recently has had a part to play in that.
The price rise has been bringing BP’s dividend yields down, but with forecasts of 5.7% on the cards, I reckon we’re still looking at one of the Footsie’s best income stocks. It seems so long ago now that BP chief Bob Dudley was telling us we were in for a few years of low oil prices but that BP was confident of its dividend.
He was right on both counts, and over the past five years, BP shareholders have pocketed around 30% in dividends (based on a 2014 share price) with an overall share gain of nearly 20%. Not bad for an oil crisis, what?
But for those who were holding off for the end of the turmoil and risk, is it time to buy back in now?
Well, there has been one advantage from the past few lean years. Big oil companies, including BP, have been shedding non-core assets and reducing their costs, and BP is now producing oil at significantly lower cost levels.
I’ve always considered BP a great long-term income buy, but today I think we’re seeing the added bonus of lower risk through that safer balance sheet and lower costs. I would still like to see debt brought down, but BP is looking the safest it’s been for ages to me.
The commodities cycle has been tough after years of production surplus and wobbly demand, and Glencore (LSE: GLEN) shareholders might have wondered why they bothered. Even the recovery from 2016’s big dip has left the shares behind the FTSE 100, with a five-year return of only 6%.
But 2019 has so far brought an uptick to Glencore shares with a 14% gain. In fact, miners in general are doing well — Rio Tinto and Anglo American shares are both up 26%, with BHP Group up 18%. And I see more to come.
All FTSE 100 shares are likely to be suffering from Brexit malaise, and we see Glencore’s forward P/E multiples dropping as low as 10 by 2020, at a time when analysts are bullish about rising earnings. But Glencore operates on the worldwide metals and minerals markets, and really couldn’t care whether we Brits are in the European Union or not.
That P/E has risen a little as the shares have picked up this year, and the dividend yield has dropped back a bit. But we’re still looking at a forecast 5.1% from dividends this year, with 5.6% on the cards next. Those look attractive in their own right, and a high dividend yield in a cyclical industry like this could suggest we’re still waiting for more upswing.
It’s been a long down cycle this time, but I rate Glencore shares as tempting now.
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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.