In my search for cheap shares, I sifted through the FTSE 100 this morning and found these three stocks.
Steep falls produce cheap shares
Of the 100 firms in the Footsie, 99 have been in the index for at least a year. Of these 99, only 35 share prices have risen over 12 months. Thus, 64 stocks have fallen since last November. Among these 64 fallers, 12-month losses range from 2% to 72%, with the average decline being 28.1%. Furthermore, 34 of these losers have crashed 25%+, which is where I found these three shares:
Cheap shares #1: oil be back
The first of my bombed-out shares is oil giant BP (LSE: BP), whose shares have collapsed by 59.7% in a year, making BP the third-worst performer among my FTSE 100 fallen angels.
Today, BP’s market value is just £39.8bn, having lost £59bn in 12 months. Three events have crushed BP, the first being Covid-19. The second is the crashing Brent Crude price, down from $70 a barrel to $37 today. Third, BP halved its quarterly dividend, with its 25 September payout being 5.25 cents.
As I write, BP shares trade at 200.3p, just 6.3% above their 52-week low of 188.52p from last Wednesday. But with a rebased yearly dividend of 21 cents (16.3p), BP’s dividend yield is 8.1%. That’s a very healthy cash payout while waiting for its cheap shares to recover.
Faller #2: Banking on recovery
The second of my cheap shares is Lloyds Banking Group (LSE: LLOY). Lloyds shares have more than halved, crashing 51.9% over 12 months. Today, the UK’s largest bank (with 30m customers) is worth £19.8bn. Of course, being the UK’s largest lender during the worst economic collapse in 300 years is hardly ideal, with Lloyds’ 2020 earnings eviscerated by loan losses.
What’s more, at the urging of the banking regulator, Lloyds and other UK banks have suspended their once-generous dividends. Yet Lloyds actually made £1bn of profit in the third quarter. Furthermore, the main measure of its financial strength — its Common Equity Tier 1 (CET1) ratio — is 15.2%, versus a minimum requirement of 11%. For now, the bank’s balance sheet is in rude health. That’s why I think these cheap shares will bounce back strongly in 2021.
Loser #3: drug reeling
Last on my list is GlaxoSmithKline (LSE: GSK), whose shares are down a quarter (25.2%) in 12 months. GSK share price is 1,317p, valuing the pharmaceutical giant at £64.8bn. Habitual Fool readers will know that GSK is one of my favourite British success stories, and I have owned its shares for most of the past three decades.
Back on 24 January, before the pandemic panic, GSK shares hit a 52-week high of 1,857p. Hence, its stock is down 540p (29%) from its 2020 peak, which has me shaking my head. After all, GSK shares trade on a lowly price-to-earnings ratio of 10.2, for an earnings yield of 9.8%. What’s more, they pay a generous dividend of 80p a share, producing a dividend yield of 6.1% a year. On basic fundamentals, these are clearly cheap shares, with GSK trading well below historical valuations.
So, which of these three cheap shares would I pick? Honestly, I would buy all three, partly because they are well-diversified across different industries. Also, two pay attractive cash dividends, with Lloyds’ payouts surely returning in 2021. Lastly, I expect significant future capital gains from all three. Hence, I would buy this trio of cheap shares, ideally inside an ISA, to enjoy their streams of tax-free dividends and future capital gains!
Cliffdarcy owns shares in GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and Lloyds Banking Group. 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.