Do fresh FTSE 100 falls mean UK stocks are a value trap or a screaming buy?

Russ Mould
6 December 2018

“December’s failure (so far) to deliver a Santa rally means the FTSE 100 is trading at a two-year low and now also stands below the 6,930 level at which it peaked on 31 December 1999, just before the technology, media and telecoms bubble burst,” says Russ Mould, AJ Bell investment director.

“This means investors are now left to decide whether this is a chance to buy on what is now becoming a big dip in the UK’s premier index, which topped out for the year, on a closing basis, at 7,877 on 22 May.

“The question is whether value is emerging from the UK stock market – and some investors may be tempted to think so, with 31 FTSE 100 firms trading on a forward price/earnings ratio for 2019 of less than 10 times and 38 of the index’s members offering a dividend yield of more than 5% for next year, according to analysts’ consensus forecasts.

Twenty cheapest FTSE 100 stocks, based on 2019 price/earnings ratio (PE)

    2019E Price/earnings ratio 2019E Earnings per share growth (%)

1

International Cons. Airlines

6.0 x

(1%)

2

Aviva

6.3 x

7%

3

Taylor Wimpey

6.4 x

1%

4

3i

6.6 x

(4%)

5

Barclays

6.8 x

11%

6

Barratt Developments

6.9 x

2%

7

Persimmon

7.1 x

2%

8

Glencore

7.2 x

(0%)

9

Lloyds

7.3 x

0%

10

Legal and General

7.6 x

4%

11

Evraz

7.6 x

(23%)

12

Smurfit Kappa

7.8 x

1%

13

Royal Bank of Scotland

7.8 x

(1%)

14

Smith DS

7.9 x

9%

15

WPP

7.9 x

(3%)

16

Imperial Brands

8.5 x

3%

17

Ashtead

8.6 x

14%

18

British American Tobacco

8.8 x

8%

19

Anglo American

8.9 x

(1%)

20

Kingfisher

9.0 x

17%

 

FTSE 100

11.3 x

8%

Source: Digital Look, Refinitiv data, consensus analysts’ forecasts

Twenty highest forecast 2019 dividend yields from FTSE 100 stocks

   

2019 E

   

Dividend yield

Dividend growth

Dividend cover

1

Evraz

13.7%

(12%)

1.09 x

2

Persimmon

11.8%

0%

1.20 x

3

Taylor Wimpey

11.1%

18%

1.19 x

4

Barratt Developments

9.3%

3%

1.51 x

5

Standard Life Aberdeen

9.2%

4%

1.01 x

6

SSE

8.9%

(16%)

1.24 x

7

Centrica

8.7%

(3%)

1.09 x

8

Direct Line

8.5%

5%

1.10 x

9

Vodafone

8.3%

0%

0.75 x

10

Imperial Brands

7.9%

10%

1.36 x

11

Aviva

7.8%

11%

1.84 x

12

British American Tobacco

7.3%

6%

1.49 x

13

WPP

7.2%

(1%)

1.77 x

14

Legal and General

6.9%

7%

1.78 x

15

Admiral Group

6.8%

13%

0.97 x

16

Marks & Spencer

6.5%

0%

1.29 x

17

Rio Tinto

6.5%

(7%)

1.61 x

18

Royal Dutch Shell

6.3%

0%

1.70 x

19

HSBC

6.2%

1%

1.47 x

20

BP

6.1%

1%

1.57 x

 

FTSE 100

4.9%

4%

1.79 x

Source: Digital Look, Refinitiv data, consensus analysts’ forecasts

“There are still two issues for value-seekers to address.

“The first is whether analysts’ forecasts are reliable. Estimates of 8% growth in earnings and 4% in dividends across the whole of the FTSE 100 might not sound like much, but if the UK economy slips into an unexpected recession, and is joined there by say the USA, then such figures are likely to prove wildly optimistic.

“The second is what could be the catalyst to persuade investors to revisit UK stocks once more. Even if they are unloved, have underperformed and could be undervalued, you could have said the same a year ago, to no particular effect, as it turned out.

“Some – any – visibility on what Brexit will look like and what it may mean could be the answer. Once investors know what they are dealing with, whatever it may be, then they have a chance to rationally assess earnings and dividend forecasts and thus valuations.

“As such, dip-buyers may have to be brave and patient – but then the darkest hour always comes before the dawn.”

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