Until March, the FTSE 100 hadn’t traded under 6,000 since 2016. And although the economic outlook still isn’t great, I believe the UK stock market contains some bargain buys at current levels.
I’ve been adding steadily to my portfolio since March. Today, I’m going to look at three cheap FTSE 100 shares from my buy list.
I’d buy on bad news
It’s been a pretty awful year for the oil market. Global lockdowns triggered an oil price crash and big producers are facing renewed pressure to cut emissions. Shares in Royal Dutch Shell (LSE: RDSB) have fallen by 55% to just over 1,000p.
Some investors worry this is the beginning of the end for Shell. But I think it’s more likely to be a buying opportunity. The company aims to reduce its emissions to net zero by 2050 and is investing more heavily in renewables.
In the meantime, Shell’s massive oil and gas resources should continue to generate cash for the group. The company’s transformation isn’t a sure thing. But Shell has a global footprint, large-scale engineering skills and a sophisticated energy trading business. I think these assets will be valuable as we move towards a lower-carbon world.
With Shell shares now trading on just 10 times 2021 forecast earnings, with a 6% dividend yield, I rate this FTSE 100 stock a buy for income.
Don’t ignore this essential sector
Every time we order something online or shop at a supermarket, part of what we’re paying for is packaging. It’s not popular and can create a lot of waste, but packaging is also essential to our way of life.
The FTSE 100 is home to no fewer than three packaging groups. The one I’ve been buying is DS Smith (LSE: SMDS), which recently sold its plastics business and is now focused on fibre-based packaging — that’s paper and cardboard to you and me.
DS Smith’s aim is to use recycled material wherever possible and to create a “circular economy“. The company is a major recycler in addition to producing packaging for sectors including food, consumer goods and e-commerce.
A long recession could see demand for the firm’s products slump, but DS Smith says sales have returned to growth since August. I believe the risks of a further slowdown are already priced into the firm’s shares, which trade on 11 times forecast earnings. I rate DS Smith as a buy.
The FTSE 100’s cheapest share?
Insurance group Aviva (LSE: AV) has been a frustrating investment for many years, never managing to deliver reliable growth.
However, patient shareholders (including me) have enjoyed some generous dividends and the company is now under new management. New CEO Amanda Blanc appears determined to pull the business into shape and has already started to make changes.
Blanc is widely experienced in the insurance sector and I think she has a better-than-average chance of success. I also think it’s worth remembering that Aviva has remained profitable and cash generative in recent years — this isn’t an emergency.
Right now, Aviva shares trade on around 5.5 times forecast earnings. I think that’s just too cheap, especially as earnings in recent years have been backed by strong cash generation.
In my view, Aviva could be the cheapest stock in the FTSE 100 right now. I see this stock as a low-risk buy for income investors.
