Cheap UK shares: I’d follow Warren Buffett’s strategy to get rich

After recent legal news, Roland Head reckons these cheap UK shares should be on the radar for investors who want income and growth.

| 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.

Warren Buffett is well known for his love of “buying quality merchandise when it is marked down.” I think he’d be interested in both of the cheap UK shares I’m going to look at today.

Both companies operate in the insurance sector, which is where Buffett made his fortune. Insurers are out of favour in the UK at the moment, but recent news suggests to me that investors can look forward to improving performance and some high dividend yields.

Covid claims cut

My first pick is commercial and general insurance group Hiscox (LSE: HSX). The firm is one of eight UK insurers which took part in a legal test case to clarify whether it should pay out on business interruption claims relating to the coronavirus lockdown.

The High Court has now released its judgement on this case — apparently it’s “more than 160 pages”.

What we need to know is that Hiscox’s share price rose by 17% after the firm confirmed it now expects to payout on “fewer than one third” of its 34,000 UK business interruption policies. The company now expects to payout less than £100m on these claims. Previous estimates suggested a worst-case payout of £250m, so this is much better than feared.

Hiscox shares could be cheap

Hiscox shares are down by around 40% this year, even after Tuesday’s gains. Uncertainty over Covid-related claims has been weighing on the share price, but now that we have some clarity on this I think the outlook could improve.

Indeed, I think this UK share could be cheap at current levels. Broker forecasts for 2021 suggest Hiscox could generate a earnings of $0.74 per share next year, with a dividend of $0.42.

That prices the stock on about 15 times forecast earnings, with a dividend yield of 3.8%.

For a company with a pretty successful track record, this looks very affordable to me. I’d also note that Hiscox shares are only trading at around 1.5 times book value — again, this is much lower than in recent years. I see Hiscox as a possible recovery buy.

Cheap UK shares: this 6% yield looks safe to me

Another winner from this week’s High Court judgement was FTSE 100 firm RSA Insurance Group (LSE: RSA). The RSA share price closed up by nearly 5% following that court judgement, continuing a recovery that’s seen the stock climb 50% from its March lows.

RSA now expects to face a bill for £142m relating to Covid business interruption claims in the UK, although it says the final figure could be lower. This looks easily affordable to me, given that RSA reported a surplus capital of £1.1bn at the end of June.

Shareholders should also be able to look forward to the return of RSA’s dividend. In its half-year results, the company said it expected to resume payments at the end of 2020. Management also said it’s planning to “catch up on missed dividend payments over time.”

City analysts expect RSA to declare a dividend of 27.2p for 2020, rising to 30p in 2021. These forecasts suggest a yield of 5.8% this year, rising to 6.4% next year. These forecasts look reasonable to me.

With the shares trading on just 12 times forecast earnings, I see RSA as a good, cheap, UK share to buy right now.

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.

Roland Head 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »