Image source: Getty Images
In my endless search for undervalued stocks, I often review the FTSE 100 index that searches for hidden value. Ideally, I look to buy solid companies with strong earnings and cash flows. For example, here are two Footsie stocks that my family portfolio already owns and that I would like to buy more of in 2024.
#1: PA
My wife and I bought PA (LSE: BP) in mid-August last year at 484.1 pence per share.
At first things went our way as the stock hit a high of 558p on 18 October. It has since fallen to 473.45p, valuing the oil and gas major at £80.8bn. Thus, we have a paper loss of 2.2%.
Why would I like to have more of these shares? Firstly, because big can be beautiful and BP is valued at £80.8bn, making it the fifth largest company in the FTSE 100.
Secondly, because the stock trades at a modest multiple of 3.9 times earnings, generating an excellent earnings yield of 25.4%. Third, because the market-beating 4.7% annual dividend is covered 5.4 times by earnings, making it one of the best-covered high yields in the market.
That said, I expect the group's revenue, profits and cash flow to have declined in the final quarter of 2023. This is because the oil price has fallen almost 17% from its 2023 peak at the end of September (a constant risk). Still, I hope this negative trend is already priced in.
As a bonus, if energy prices rise then BP will act as a hedge against my own household bills. However, my main reason for owning this stock is to collect cash over the years while the company becomes a low-carbon energy producer.
#2: LG and G
My second stock to top the FTSE 100 is the venerable life insurer and asset manager. Legal and General Group (LSE: LGEN). Founded in 1837, this Footsie brand celebrates its 187th birthday this year.
While working in this sector for 15 years, I became a big fan of L&G, its business model and its management. Today, it manages assets worth around £1.3 trillion for 10 million clients, from individual savers to large corporations.
At the current share price of 246.2p, this group is valued at £14.6bn, making it a midweight of the FTSE 100. We paid £246.7p for our stake in July 2022, so that we have a small loss on this purchase (but ignoring dividends).
However, I would like to buy more L&G shares this year as I think they have a good chance of outperforming the broader index. And while I wait, I'll keep collecting cash.
The big draw for me is this stock's market-beating 8%+ annual dividend yield, about double Footsie's cash yield. Furthermore, L&G has increased this payment every year since 2011, barring leaving it unchanged during Covid-ravaged 2020.
Of course, as one of Europe's largest asset managers, L&G's fate is closely linked to that of the financial markets. When stocks and bonds are booming, L&G's results often follow suit. But if asset prices plunge, as they did in 2022, the company's earnings and share price may take a hit.
In summary, I think both FTSE 100 stocks will offer superior risk-reward ratios in 2024. So, when the extra cash comes in, I'd like to buy more shares!
