Several times a week, I use stock screeners to look for undervalued shares in the elite FTSE 100 index. What I’m looking for are stocks that trade on low earnings multiples and offer market-beating dividend yields.
Here are two value stocks I found today that I’m surprised to find I don’t already own.
#1: Anglo American
My wife and I are awaiting a tax-free lump sum in early July, which we plan to invest largely in shares. One of the first stocks I expect to buy will be mining company Anglo American (LSE: AAL).
What attracts me to this £31bn Footsie stalwart? First of all, at Friday’s closing price of 2,318.5p, Anglo American shares are just 2.5% above their 52-week low of 2,263.13p, hit last Wednesday. Also, they’re down 39.1% over one year, but are up 26.1% over five years (excluding dividends).
And I see Anglo stock as a recovery play on a return to global growth. For example, when China’s economy starts firing on all cylinders again, I expect metal prices to rebound from 2023’s lows.
Also, this share trades on a lowly price-to-earnings ratio of under 7.8, for an earnings yield of 12.9%. That’s a lot higher than the FTSE 100’s earnings yield of around 8%.
Finally, Anglo’s dividend yield of almost 7.1% a year is almost double the Footsie’s yearly cash yield of around 3.7%. What’s more, this cash payout is covered over 1.8 times by historic earnings, which offers a fair margin of safety.
That said, I know from cruel experience that mining companies’ earnings and their share prices can be very volatile. Also, miners tend to slash their dividends during bad years. Indeed, Anglo did this in 2015, 2016, 2020 and 2022.
Despite these concerns, I’m optimistic on Anglo’s long-term prospects, so I can’t wait to add it to my family portfolio.
#2: M&G
My second Footsie value stock is a very different kind of company: asset manager M&G (LSE: MNG). Again, I look forward to buying this undervalued and underrated stock as soon as I can.
What draws me to this particular stock? First, it has shown recent weakness. On Friday, the shares closed at 198.35p, 13.7% below their 52-week high of 229.9p, hit on 2 March (just before the US banking crisis).
Over one year, M&G shares have lost 9.6% of their value, while they’re down 14% over five years (excluding dividends).
The asset-management business is consolidating rapidly and, with a modest market value of £4.7bn, I see M&G as a prime takeover target.
Although M&G made a loss in 2022, this year’s recovery in financial markets should send it sailing back into profit this year.
And the mouth-watering dividend yield of almost 9.9% a year is one of the highest in the London market. Then again, history suggests that cash yields approaching double digits can be indicative of future dividend cuts to come so that’s a risk.
Summing up, buying these two undervalued FTSE 100 shares will boost the dividend income of my family portfolio, while also helping to diversify it further. And that works for me!
