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As a long-term value investor, I always look for stocks that are underappreciated, overlooked, and undervalued. Right now I see the elite of the United Kingdom FTSE 100 The index is full of ‘fallen angels’ in this category.
The obvious value of the FTSE 100
As I write, the Footsie stands at 7,377.77 points. This leaves it 8.3% below its all-time high of 8,047.06, reached on February 16. And the London market’s decline over the past eight months has pushed it further into value territory.
Currently, the UK’s main market index trades at a multiple of 10.9 times earnings, producing an earnings yield of 9.2% per annum. This means its 4% annual dividend yield is covered 2.3 times by historical earnings.
To me, this clearly indicates that the FTSE 100 is deeply undervalued, both historically and geographically. Furthermore, there is even deeper value hidden within certain companies within the index.
A Footsie Bargain
My goal as co-manager of my family’s portfolio is to own large assets purchased at fair prices. Cheap UK insurer and asset manager shares for me Legal and General Group (LSE: LGEN) definitely fall into this category.
That said, Mr. Market appears to have taken the opposite view. In fact, investors have pushed L&G’s share price close to its 52-week lows. As I write, the shares are trading at 206.1p, valuing this business at £12.3bn.
Here’s how L&G shares have performed against the FTSE 100 on four time scales:
Period | FTSE 100 | LG stock | FTSE wins by |
One month | -3.2% | -8.0% | +4.9% |
Six months | -6.7% | -19.1% | +12.4% |
One year | +5.3% | -11.3% | +16.5% |
Five years | +6.4% | -15.3% | +21.7% |
My table shows that over all four periods (one month to five years) Footsie has easily outperformed L&G stock. Furthermore, this stock has lost almost a fifth of its value in half a year, which was a shock to me.
For the record, my wife and I bought Legal & General shares in July 2022, paying 246.7 pence per share. So far, we suffered a 16.5% paper loss. However, the figures above exclude cash dividends, the main reason we bought L&G shares.
L&G’s delicious dividends
Despite the untimely decline in the value of our stake in L&G, I have high hopes for this Footsie company. After all, this well-run company has been around since 1836 – that’s 187 years and counting.
Plus, this stock now looks so cheap that it seems like an obvious bargain to me. It trades at a modest forward multiple of 5.4 times earnings, yielding a whopping 18.4% earnings yield.
Even better, L&G’s market-beating 9.5% annual dividend yield is covered by 1.9 times historical earnings. In other words, while this payment isn’t as “safe as houses,” it seems solid to me.
In short, owning these FTSE 100 shares since July 2022 has caused my wife and I some short-term pain. But I expect to make a lot of profits in the long term thanks to L&G’s delicious dividends. That said, future dividends are not guaranteed, so they may be cut or canceled at any time. But I see no signs of this result at the moment!