The recent stock market crash leaves plenty of FTSE 100 shares looking grossly undervalued today. It means there are literally dozens of great opportunities for eagle-eyed investors to nip in and grab a blue-chip bargain.
Don’t bank on Barclays, though
Barclays (LSE: BARC) isn’t a Footsie share I’d be content to invest in as the UK and US economies sink, though. The banking giant set aside a whopping £2.1bn last month following initial studies of the potential economic cost of Covid-19. I worry that the business might be underestimating the scale of the problem on its way.
Could the FTSE 100 bank be forced to set more capital aside? Under its base case estimates, the UK economy will sink 8% in 2020. But this falls well short of what many other economists are predicting. The Bank of England, for example, reckons that domestic GDP could collapse as much as 14% this year.
The risks facing Barclays are significant, and the outlook for its core British operations seems to be getting worse and worse by the day. That isn’t reflected in its high forward price-to-earnings ratio of above 20 times, though. It’s a reading created by some colossal downgrades to brokers’ profits forecasts in recent weeks. They currently expect an 80% drop in annual earnings at Barclays in 2020. At current prices I’m not tempted for even a second to buy the bank’s shares.
A better FTSE 100 investment
Conversely, Severn Trent (LSE: SVR) is a large cap that should provide plenty for share pickers to get excited about whatever happens to the UK economy.
Utilities are one of the safest places to lock your money up in good times and bad. Demand for services like water provision are eternal whatever social, economic, and/or political storm clouds are on the horizon.
The likes of Severn Trent can expect a rise in missed customer payments as household budgets come under pressure, sure. But their earnings visibility remains largely unchanged despite what Covid-19 or any other calamitous issue – whether it be Brexit stress, trade wars, or whatever – threatens regional and global economic conditions.
News surrounding the FTSE 100 company’s dividend policy last week illustrates the point perfectly. Stocks of all shapes and sizes continue to axe, reduce, or suspend shareholder payouts like it’s going out of fashion. But not Severn Trent. Indeed, the water supplier decided to lift the final dividend for the fiscal year to March 2020 by 7% (to 60.05p per share) last week. Consequently the total dividend clocked in at 100.08p versus 93.37p a year earlier.
City analysts expect the dividends to continue rising, too. They anticipate a 101.8p per share total reward for the new fiscal year. And this yields a mighty 4.2%, a reading that helps take the sting out of Severn Trent’s chunky P/E ratio above 21 times. Unlike Barclays, this is a FTSE 100 share I’d happily stash in my own shares portfolio for this potentially turbulent new decade.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.