In the year since 29 June 2020, the FTSE 100 index is up roughly 880 points. That’s a gain of a seventh (14.1%) over 12 months. Adding in another, say, 3.4% for dividends gives a 12-month return of around 17.5%. That’s not bad, but many Footsie shares have made far, far larger gains. Equally, some shares have lost significant value over the past year. I’ve been rooting around in the FTSE 100’s ‘bargain bin’ looking for unloved and underperforming cheap shares. Here are two (one of which I already own) that I would happily buy in July for their rebound potential and cash dividends.
Cheap UK shares #1: Reckitt
Of 101 shares in the FTSE 100 (one is listed twice), 85 have risen in value over the past 12 months. However, 16 stocks have fallen since late-June 2020. Down among these losers is Reckitt Benckiser Group (LSE: RKT), which lies 98/101 in the performance rankings. Over 12 months, Reckitt stock has lost more than a tenth (11.4%) of its value. Also, at today’s share price of 6,453p, Reckitt stock is almost a fifth (19.5%) below its 52-week high of 8,020p on 29 July 2020. For me, this steep drop has pushed Reckitt into the ‘cheap shares’ category.
At the current share price, Reckitt is valued at £46bn, making it a FTSE 100 heavyweight. On a forecast price-to-earnings ratio of 16.1, the shares offer an earnings yield of 6.2%. The dividend yield of 2.7% is lower than the FTSE 100’s yield, but could rise over time. What I like about Reckitt lately is boss Laxman Narasimhan is restructuring the group (PDF), ditching ailing businesses to invest in growth markets. If he can pull this off, then Reckitt’s cheap shares might be worth snapping up. For me, I’d buy and hold at current price levels to await improved earnings. But if Reckitt’s latest turnaround fails, then its stock could turn out to be a value trap.
Discount stock #2: GSK
The cheap shares of pharmaceutical giant GlaxoSmithKline (LSE: GSK) have been in the doghouse for decades. Having briefly exceeded £23 in early 1999, they have never regained these former heights. Indeed, over the past year, GSK shares have declined by almost a seventh (13.7%), placing them at #100/101 in the FTSE 100 over 12 months. As a long-term shareholder in GSK, this ranking isn’t exactly what I want to see!
At the current share price of 1,429.62p, FTSE 100 heavyweight GSK is valued at £71.5bn. But the shares trade at a discount of over a seventh (14.4%) to their 52-week high of 1,669.8p, set on 20 July 2020. At the current price, they trade on a price-to-earnings ratio of 13.6 and an earnings yield of 7.3%. What’s more, the 80p-a-share dividend produces a dividend yield of 5.6%, around 50% higher than the Footsie’s yield. But what makes me think these may be cheap shares is the potential for a share-price rebound following a huge shake-up of GSK.
Next year, GSK will be split into two: New GSK and New Consumer Healthcare. To reinvigorate the group, CEO Dame Emma Walmsley has set demanding targets for sales and earnings growth. The cash dividend will also be cut to 55p a share in 2020, but might rise thereafter. If this major strategic overhaul pays off, then it could inject new life into GSK. But if the company continues on its recent path of declining sales, then these cheap shares could suffer. For now, I’ll keep reinvesting my dividends into yet more GSK shares.
