Barring a late-year miracle, 2020 looks like a year of large losses for most UK shareholders. By Halloween, the FTSE 100 had crashed more than a quarter in 2020, losing 1,965 points (26.1%) to stand at 5,577.27. Things are way better in New York, where the S&P 500 index is actually up 1.2% this calendar year. This American outperformance is largely down to hefty rises in US tech mega-stocks during 2020. Meanwhile, many British mega-cap stocks have suffered heavy losses this year. This convinces me that there are plenty of cheap shares lurking within the FTSE 100 today.
Cheap shares get battered in 2020
Another reason for the significant outperformance of the S&P 500 versus the FTSE 100 is the heavier weighting of growth shares in the US index. Conversely, the FTSE 100 is packed with ‘old economy’ value shares that have fallen out of favour with investors. In fact, value investing itself is undergoing its worst crisis in almost 200 years, as I revealed on Tuesday. Nevertheless, I’m convinced that cheap shares with solid earnings and high cash dividends will once again enjoy their day in the sun.
The insurance industry is holding up
Having worked in the insurance industry for 15 years of my career, I know just how profitable and lucrative the UK market can be. Generally speaking, the bigger and more diversified the insurer, the higher its profits can pile up. What’s more, the Covid-19 pandemic hasn’t been as awful for the insurance industry as you’d expect. Most UK deaths have sadly been among the over-65s, who generally don’t have much life insurance. However, this cohort does buy almost all the annuities (guaranteed lifetime incomes) sold by insurers. Hence, life assurers haven’t suffered big losses, plus claims on home and motor insurance fell steeply during lockdowns. That’s why I see plenty of cheap shares hiding in plain sight in this sector.
This FTSE 100 stock has crashed this year
Aviva (LSE: AV) is one quality company with cheap shares that is glued to my value watchlist. Aviva is really huge: it has 33.4 million customers worldwide, spread across savings, retirement and insurance products. In the UK, Aviva is #1 in workplace pensions, individual annuities and general insurance. Also, it has extensive operations in Europe and Asia (some of which are being sold). What’s more, with origins dating back to 1696, Aviva has survived over 320 years.
On Friday, Aviva shares closed at 257.5p, down 38.2% over the past 12 months. At their 52-week high on 12 November 2019, they peaked at 439.4p, over 1.7 times their current level. During the March market meltdown, they crashed to 205.7p on 19 March, making these cheap shares an absolute bargain at the time.
Today, Aviva shares stand just a quarter above their 2019/20 bottom (which in itself was a 10-year low). The entire group is valued at just £10.1bn, which seems crazily low to me for a quality business with reliable earnings. Furthermore, it recently announced a 6p-per-share dividend, having cut its previous cash payout at the urging of its regulator.
In short, getting into Aviva today buys you cheap shares that trade on a price-to-earnings ratio of roughly five and a prospective dividend yield above 11%. To me, this stock is crazily mispriced. That’s why I’d happily buy it today — ideally inside an ISA — to bank a lifetime of bumper cash dividends, plus future capital gains!
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.