This week has been grim for the FTSE 100, the UK’s main market index. As I write, the Footsie hovers around 5,600 points, having shed close to 200 points (3.4%) since last Friday. It’s not been the best month for the index either, as it’s lost about 265 points (4.5%) in 30 days. And it’s been an absolute horror-show 2020 for UK shareholders, with the Footsie crashing over 2,000 points (26.4%) this calendar year. Still, at least now’s a good time for bargain-hunters seeking cheap shares, right?
Cheap shares are everywhere today
With Britain’s future being battered by Covid-19 and the risk of a no-deal Brexit, it’s no wonder that UK investors are selling in droves. Yet for every seller, there’s a buyer — and I think now could prove to be a great time for patient value investors. After all, with the FTSE 100 falling by more than a quarter in 2020, there’s no shortage of cheap shares. Indeed, many companies with depressed share prices are actually doing fine, despite the economic havoc caused by Covid-19 lockdowns. Hence, I see the latter part of this year presenting excellent buying opportunities for lovers of cheap shares.
This is a great FTSE 100 firm
Legal & General (LSE: LGEN) is one of my most-admired British businesses. L&G is a household name in the UK, having been around since 1836. It’s a leading global asset manager, with over £1trn under management. It’s also the UK’s #1 provider of individual life assurance policies, as well as a big player in lifetime mortgages/equity release, pensions, and annuities. L&G has over 10m customers worldwide. It has an excellent brand, a solid reputation, and a good management team. Yet its stock is among the cheapest of cheap shares in the FTSE 100.
Yet L&G’s share price has slumped
As Christmas 2019 approached, and before Covid-19 crushed stock markets worldwide, L&G shares were riding high. Indeed, they closed at a 52-week high of 324.7p on 13 December. Even as recently as 19 February, L&G’s stock closed at 318.3p. Then came one of the fastest and steepest market collapses in peacetime. On 19 March, L&G’s stock had collapsed to 138p, down a stunning 56.6% in a single month. At this mega-bargain price, L&G was buried deep in the FTSE 100’s ‘cheap shares’ bin.
L&G’s stock then staged a solid comeback, rising to hit 252.2p on 8 June, but it’s mostly been downhill ever since. As I write, L&G trades at 184.5p, valuing this great British company at a mere £11.1bn. I honestly believe that this is far too cheap for a firm of L&G’s quality. That’s partly why these cheap shares are a firm buy for me.
These cheap shares pay a delicious dividend
Despite being an excellent enterprise with a practically bombproof balance sheet, L&G’s earnings are lowly rated. At today’s price, its shares trade on a price-to-earnings ratio of 9.07, for a chunky earnings yield of 11%. Although L&G skipped its final dividend in the spring, it paid an unchanged interim dividend of 4.93p on 24 September. Applying the 2019 total dividend of 17.57p to the current share price generates a whopping dividend yield of 9.5% a year.
For me, such strong fundamentals from a quality business make these cheap shares a compelling buy for value investors and income seekers. Hence, I’d buy and hold L&G shares today, ideally inside an ISA, to bank years of high tax-free income, plus future capital gains to come!
Cliffdarcy 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.