The FTSE 100 is an index of the biggest companies listed on the London stock market. Many of them have large price tags to match.
But I think some FTSE 100 shares look cheap relative to their earnings (using something known as a price-to-earnings or P/E ratio). They offer juicy dividends to boot.
Here are a couple of such shares. One I would happily buy today with spare cash – and the other I sold in recent months.
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British American Tobacco
The company British American Tobacco (LSE: BATS) pretty much does what its name suggests.
Although the US is a key market for it, the firm operates in a wide range of countries. It also has a large portfolio of brands that can give it pricing power and help the firm compete against local rivals.
Cigarettes are cheap to make but can be sold at high prices. That means the industry has excellent cash generation properties. Last year, British American generated £10.4bn in net cash from operating activities.
What to do with all that money?
One option is paying a dividend. British American does so quarterly. Last year’s payout grew by 6%, continuing a decades-long run of annual increases. The current yield is 7.9%. The P/E ratio of under 10 looks cheap to me.
But the cash flows also need to service debt. The company ended last year with adjusted net debt of £38bn, which I see as a lot.
Another risk is the declining global demand for cigarettes. British American is growing its non-cigarette business quickly, but it remains to be proven how profitable that will turn out to be. For now, though, the core business is far from being a fag end. Indeed, British American sold over 11bn cigarette sticks per week on average last year.
Vodafone
Another FTSE 100 company with a sizeable debt pile is telecoms operator Vodafone (LSE: VOD). It had €46bn of net debt at the half-year point.
In its most recent full-year results, operating cash inflow was an impressive €18bn. But running a telecoms business, with costs like licenses and network maintenance, can be a costly business. So the net cash inflow at Vodafone last year was €1.5bn. That was less than half of the equivalent amount at British American, despite the tobacco company having much smaller revenues than Vodafone.
That cash generation is still substantial and I do see many positive things about Vodafone. It has a strong brand, large customer base, and a leading position in many markets. On top of that, the shares currently yield 8.4%. Vodafone trades on a P/E ratio of 14.
But, whereas British American has consistently raised its annual dividend for years, Vodafone’s payout has been flat since 2019, when there was a big cut. The company’s balance sheet makes me nervous that it could cut the dividend in future to help service its large debt, especially if interest rates stay high.
That is why, although I continue to like the business and its income potential, I sold my Vodafone shares earlier this year. By contrast, if I had spare cash to spend on FTSE 100 shares today, I would be happy to top up my existing holding of British American Tobacco.
