Since 22 June, I’ve written only two articles for this website. One reason for this is that, having watched stock prices keep falling, I’ve finally taken the plunge by buying some cheap shares. Predictably, as soon as we bought these cheap stocks (inside my wife’s tax-free ISA account), all four promptly fell even further. Typical, right?
We bought these four cheap shares
Last week, we decided to invest the same modest sum to buy shares of these four FTSE 350 companies. Since then, these stocks have fallen by between 2.5% and 8.8% after purchase. Oops.
| Company | Lloyds Banking Group | Royal Mail | ITV | Rio Tinto |
| Industry | Bank | Postal services | Broadcaster | Miner |
| Share price | 41.6p | 268.9p | 63.1p | 4,708.5p |
| 52-week low | 38.1p | 257.4p | 62.0p | 4,354.0p |
| 52-week high | 56.0p | 584.0p | 129.4p | 6343.0p |
| 12-month change | -10.4% | -53.2% | -49.9% | -20.0% |
| Market value | £28.6bn | £2.6bn | £2.5bn | £80.0bn |
| P/E ratio | 5.6 | 4.4 | 6.8 | 4.4 |
| Earnings yield | 17.9% | 22.8% | 14.8% | 22.7% |
| Dividend yield | 4.8% | 6.2% | 5.2% | 12.3% |
| Dividend cover | 3.7 | 3.7 | 2.8 | 1.9 |
As a veteran value investor, I’m happy to buy into good businesses at reasonable prices. Thus, the first reason we decided to buy these four shares was they have all declined in value over the past 12 months. These declines range from just over a tenth at Lloyds Banking Group to more than half at Royal Mail.
The second reason we bought these four stocks was because they are all simple, easy-to-understand businesses. Lloyds is one of the UK’s leading retail banks, while Royal Mail delivers post to around 31m British addresses. Likewise, ITV is the UK’s leading commercial terrestrial broadcaster, while Rio Tinto is a global behemoth in digging up and selling metals and other raw materials.
All four stocks look cheap to me
But the main reason we bit the bullet by buying these four shares is they all look fundamentally cheap to me. For example, their price-to-earnings (P/E) ratios range from 4.4 to 6.8, which translates into hefty earnings yields of between 14.8% and 22.8% a year. In contrast, the FTSE 100 index has a P/E of 16.2 and an earnings yield of under 6.2%.
In addition, we bought into these four companies because each pays generous cash dividends to shareholders. These cash yields range from 4.8% to 12.3% a year, versus roughly 3.9% a year for the FTSE 100. However, company dividends are not guaranteed and can be cut or cancelled at any time. Even so, I’d happily pocket these cash payouts while waiting for these share prices to rebound.
Finally, all four dividend yields are covered several times over by trailing earnings. Then again, I’m fully expecting earnings declines in 2022-23, as rising interest rates, red-hot inflation and slowing global growth hit company profits. Also, I’m becoming increasingly concerned by the rising possibility of a recession driven by falling consumer spending.
Nevertheless, I suspect a lot of bad news is already baked into these cheap shares, which is why we got the ball rolling on our new portfolio. After all, we have to invest our spare cash somewhere, right?
