Image source: Getty Images
In the second half of 2021, I repeatedly warned that financial assets had become an ‘everything bubble’ that was doomed to burst. And so it happened. But during that time, I also wrote that UK stocks, and especially FTSE 100 stocks: they looked unbelievably cheap.
UK stocks come back
While global stock markets crashed last year, the FTSE 100 was a safe harbor in this storm. In fact, the index actually rose 0.9% in 2022. Adding, say, another 4% for cash dividends brought Footsie’s annual return to almost 5%. This made it the best performer among the major market indices last year.
For me, the reason for this overall outperformance was that UK stocks were simply too cheap. However, even after the recent rises, London-listed stocks still look very cheap to me. Here are three reasons why.
1. FTSE 100 gains are modestly rated
In both global and geographical terms, the FTSE 100 seems undervalued to me. Going forward, it trades at less than 12 times earnings. This gives the index an earnings yield of 8.3%.
Meanwhile, the US S&P 500 the index trades with a forward rating of almost 18 times earnings. This translates to an earnings yield of 5.6% per year.
Therefore, UK stocks look much cheaper than US ones. But history suggests that US stocks get higher ratings because of their higher earnings growth. Despite this, the FTSE 100 still looks cheap to me.
2. UK Stocks Offer Attractive Cash Dividends
As a dividend investor, I enjoy scanning the FTSE 100 for income generating stocks. Fortunately, almost all Footsie companies pay cash dividends to their shareholders.
Currently, the UK blue chip index offers a forward dividend yield of 4% per annum. To me, that’s a pretty decent ongoing return for taking the risk of investing in the company’s stock.
Meanwhile, on the other side of the Atlantic, the S&P 500 offers a cash return of just 1.7% per year. However, US corporations generally prefer to reinvest their profits in their businesses, rather than pay cash to their owners.
However, I like the balance and drag that the FTSE 100’s market-leading dividend yield provides to my family portfolio. But as a value, dividend and income investor, I can be somewhat biased!
3. Cheap acquisition targets
In 2022-23, UK companies increasingly became the target of cash-rich bidders. In fact, no fewer than 49 London-listed companies were the subject of takeover bids last year, according to a UK investment platform.
Just this week, John Wood Group – a leadership FTSE 250 oil services company — admitted turning down three cash offers from a US private equity giant. His shares shot up 28% on Thursday after this news.
With the US private equity Goliaths sitting on huge amounts of uninvested cash, I expect more buyout activity this year among FTSE 100 and FTSE 250 companies. Additionally, the weakness of the pound against the US dollar makes our listed companies look crazy cheap to American buyers.
In short, with the FTSE 100 trading at a 15% discount to global stocks today, I’m still a fan of cheap UK stocks. And that’s despite my growing concerns about skyrocketing inflation, rising interest rates, and a possible prolonged recession!
var config = {
apiKey: ‘1ed121d592e04642d57912bb369ef696621661a3’,
product: ‘PRO_MULTISITE’,
logConsent: false,
notifyOnce: false,
initialState: ‘NOTIFY’,
position: ‘LEFT’,
theme: ‘DARK’,
layout: ‘SLIDEOUT’,
toggleType: ‘slider’,
iabCMP: false,
closeStyle: ‘button’,
consentCookieExpiry: 90,
subDomains : true,
rejectButton: false,
settingsStyle : ‘button’,
encodeCookie : false,
accessibility: {
accessKey: ‘C’,
highlightFocus: false },
onLoad: function () { // hide Cookie Control recommended settings button.
var recommendedSettingsButton = document.getElementById(‘ccc-recommended-settings’);
if (recommendedSettingsButton) {
recommendedSettingsButton.classList.add(‘hide’);
} },
text: {
title: ‘Privacy Notice’,
intro: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
necessaryTitle: ”,
necessaryDescription: ”,
thirdPartyTitle: ‘Warning: Some cookies require your attention’,
thirdPartyDescription: ‘Consent for the following cookies could not be automatically revoked. Please follow the link(s) below to opt out manually.’,
on: ‘On’,
off: ‘Off’,
accept: ‘Accept’,
settings: ‘Cookie Preferences’,
acceptRecommended: ‘Accept Recommended Settings’,
notifyTitle: ‘Privacy Notice’,
notifyDescription: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
closeLabel: ‘Save Preferences and Close’,
accessibilityAlert: ‘This site uses cookies to store information. Press accesskey C to learn more about your options.’,
rejectSettings: ‘Reject All’,
reject: ‘Reject’,
},
branding: {
fontColor: ‘#fff’,
fontFamily: ‘Arial,sans-serif’,
fontSizeTitle: ‘1.2em’,
fontSizeHeaders: ‘1em’,
fontSize: ‘1em’,
backgroundColor: ‘#313147’,
toggleText: ‘#fff’,
toggleColor: ‘#2f2f5f’,
toggleBackground: ‘#111125’,
alertText: ‘#fff’,
alertBackground: ‘#111125’,
acceptText: ‘#ffffff’,
acceptBackground: ‘#111125′,
buttonIcon: null,
buttonIconWidth: ’64px’,
buttonIconHeight: ’64px’,
removeIcon: false,
removeAbout: false },
necessaryCookies: ( ‘wordpress_*’,’wordpress_logged_in_*’,’CookieControl’,’PHPSESSID’,’fivc’,’fivs’,’fivp’,’Ookie’,’Fool_subinfo’,’_gads’,’_gid’,’_gat’,’_ga’,’__utma’ ),
optionalCookies: (
{
name: ‘Sharing’,
label: ‘I would like content tailored to my personal preferences.’,
description: ‘We work with advertising partners to show you ads of products and services you may be interested in. You can choose whether or not to have ads delivered in a personalised way by setting this option. You can return to review this setting at any time by clicking the "C" logo in the bottom left corner of any page.’,
cookies: ( ‘_ga’, ‘_gid’, ‘_gat’, ‘__utma’, ‘_gads’ ),
onAccept: function () {
// Add Facebook Pixel
!function(f,b,e,v,n,t,s)
{if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;
n.queue=();t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)(0);
s.parentNode.insertBefore(t,s)}(window,document,’script’,
‘https://connect.facebook.net/en_US/fbevents.js’);
fbq(‘init’, ‘901682110316659’);
fbq(‘track’, ‘PageView’);
fbq(‘consent’, ‘grant’);
// End Facebook Pixel
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, true ) ;
},
onRevoke: function () {
fbq(‘consent’, ‘revoke’);
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, false ) ;
},
recommendedState: ‘on’,
lawfulBasis: ‘consent’,
},
),
statement: {
description: ”,
name: ”,
url: ‘https://www.fool.co.uk/help/privacy-and-cookie-statement/’,
updated: ”
},
};
CookieControl.load(config);
