UK shares have been trading at dirt cheap valuations lately, and I’ve been taking full advantage by snapping up high-yielding FTSE 100 stocks. Frankly, I’ve been spoiled for choice.
At one point, 15 stocks on the index were yielding at least 6% a year. Some offered blistering income of 8%, 9%, or even 10%. Better still, most were trading at less than 10 times earnings. While dividends are never guaranteed, they looked too good to ignore.
I topped up existing holdings in Lloyds Banking Group and fund manager M&G. Then I bought Legal & General Group. At the time it was valued at around seven times earnings, while yielding almost 8%. It looked an unmissable bargain.
I’ve been on a shopping spree
Investors were somehow disappointed with all three stocks, which is why they were so cheap. Yet I found it hard to see why. It’s not as if the companies were losing money. In fact they were making it, in large amounts.
In May, Lloyds posted a Q1 pre-tax profit of £2.26bn, smashing analyst forecasts after soaring 46% year-on-year. Its shares then fell for three months as markets looked for things that were going wrong, while ignoring what had just gone right.
It was a similar story with M&G, L&G and another FTSE 100 stock I bought, corrugated paper giant Smurfit Kappa Group. It was trading at around seven times earnings while yielding 7%, despite Q1 revenues jumping 33% to €3.02bn, with EBITDA earnings also up 33% to €514m.
I also took a deep breath and bought the Scottish Mortgage Investment Trust, despite harbouring serious doubts about its management’s recent decision making. After recent sharp falls, it felt like I was looking a gift horse in the mouth. Finally, I bought Unilever, which wasn’t as cheap and didn’t yield as much, but offered some defensive balance.
Wednesday’s stock market rebound, when the FTSE 100 jumped 1.8% on June’s lower-than-expected inflation number, felt like confirmation that my strategy was the right one. The Scottish Mortgage share price led the way jumping 4.65%, closely followed by L&G with 4.5% growth, then M&G at 4.15%, and Lloyds which climbed 2.2%. Smurfit Kappa and Unilever put on a decent show too.
Taking a chance is paying off
It’s been a tough few months for FTSE 100 investors, as the market retreated from February’s all-time high of 8,014 to around 7,250, a drop of almost 10%. Plenty of experts were writing off UK shares, which Bloomberg derided as “still cheap and hated”. For me, that was the perfect ‘buy’ signal. Yesterday felt like sweet vindication.
One successful day is neither here nor there in the long run. If the next set of consumer data disappoints, or any other issue knocks investor confidence, my joy could prove short lived. It could easily happen. I’ve no idea what the future holds. Nobody does.
The one thing I knew for sure was that a bunch of profitable companies were going cheap after being shunned by investors. So I bought them. My only regret is that I didn’t buy more. It’s not too late though. There are still plenty of cheap UK shares out there. Just not quite as cheap as they were.
