As a value investor on the hunt for cheap shares, I usually confine my search to the FTSE 100 — the UK’s main market index. With the Footsie down a whopping 1,780 points (23.6%) this calendar year, I believe there are many ‘deep value’ cheap shares hiding in plain sight in the FTSE 100 today.
Cheap shares: I like ‘SLR stocks’
One reason why I hunt so enthusiastically in the FTSE 100 is that I prefer to invest in what I call ‘SLR stocks’. These are cheap shares that offer Safety, Liquidity, and Returns. In these troubled times, with the resurging Covid-19 pandemic, Safety (as in avoiding substantial losses) is paramount to me. Likewise, Liquidity (the ability to buy and sell shares with low spreads) is highest in the FTSE 100. Lastly, I’m looking for Returns — regular cash dividends and future capital gains that will help me to retire rich.
I like the look of Prudential
Prudential (LSE: PRU) has been a household name in the UK for generations. Founded in London in 1848, ‘the Pru’ had become the UK’s biggest life assurer by late Victorian times. One hundred years ago, one in three British adults was protected by the Pru. Having been around for 172 years, the Pru was the #1 name in UK insurance, protection, and savings policies before floating off these operations. Yet I think these cheap shares have fallen too far and are primed for recovery in 2021.
As I write, Prudential shares trade at just over a tenner (1,010p), valuing the long-established group at around £26bn. However, the share price has bounced up and down like a rubber ball in 2020. Before Covid-19 lockdowns crashed the economy, Prudential’s share price was riding high at 1,509p on 20 February (nearly 50% above today’s price). Less than a month later, on 19 March, the price had collapsed below 683p, crashing a shocking 54.8% in four weeks. Clearly, at this spring low, these were exceptionally cheap shares.
I expect these cheap shares to bounce back next year
Prudential’s cheap shares haven’t performed well for shareholders for quite some time. They are down 18% over three months, 29% over a year, 40% over three years, and 27% over five years. Yet Prudential is changing and evolving to meet the demands of the 21st century. It will hive off its US Jackson Life business into a separate company in the first half of 2020. This will allow the group to focus on faster-growing markets in Africa and Asia. In the first half of 2020, adjusted pre-tax profit slipped a mere 3% to $2.54bn. Not bad, given the gruesome economic background.
In its first-half results, the Pru said it intends to pay a dividend of 16.1 cents (12.35p) in 2020. It has already paid an interim dividend of 5.37 cents (4.12p). This gives the shares a modest dividend yield of 1.22%. At today’s price, Prudential shares trade on a forward price-to-earnings ratio as low as 7.8, for an earnings yield of 12.8%. That’s too low a rating for a business poised to rebound next year. That’s why I’d buy these cheap shares today, ideally inside a tax-free ISA, to enjoy future capital gains and steadily rising dividends!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.