These FTSE 100 shares look massively undervalued by the market. Here is why I’d buy them for my portfolio today.
A green energy play
Electricity generator SSE (LSE:SSE) has declined sharply in value since mid-summer. The FTSE 100 firm has fallen as interest rates have steadily risen, pushing up the cost of its borrowing.
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This could remain a problem going forwards given how high UK inflation remains. But despite this, I think the company’s shares are too cheap to ignore. Today, SSE shares trade on a forward price-to-earnings (P/E) ratio of just 9.9 times.
In fact, I think this low valuation makes the renewable energy specialist a brilliant bargain. Firstly, the defensive nature of its operations makes it an ideal pick as the global economy splutters. Cash flows and profits at energy creators and transmitters remain stable regardless of broader economic conditions.
I also like SSE shares because of the company’s focus on green energy. It is on course to triple renewable energy output by 2031 as it rapidly builds its offshore wind farms. This should set it up nicely as the climate crisis supercharges demand for cleaner energy sources
On the dividend front, SSE at first glance doesn’t appear that impressive. Shareholder payouts will be cut this financial year (to March 2024) as the business prioritises investment in its assets. This means the yield falls from previously towering levels to a decent-if-unspectacular 3.9%.
But investors need to consider two important things. Firstly, the dividend yield still beats the FTSE 100 average (albeit by a whisker). And secondly, dividends are tipped to rise rapidly over the following two years, resulting in an eventual 4.5% yield for financial 2026.
Producing electricity from renewable sources can be problematic in calm and cloudy periods. But while this could impact SSE’s profits temporarily, over the long term I expect earnings here to grow strongly.
Mighty miner
Mining giant Anglo American (LSE:AAL) is another dirt-cheap FTSE 100 share on my radar today. It trades on an even lower forward P/E ratio of 9.4 times. And its dividend yield for 2023 sits at a fatty 4.5%.
Unlike SSE, companies like this are highly sensitive to broader economic conditions. Demand for industrial metals is weak right now — and especially as key consumer China struggles — and may remain so in 2024 if interest rates keep rising.
Yet I believe this uncertainty is baked into Anglo American’s ultra-low share price. As a long-term investor I’m considering buying the mining giant also as a potential play on the clean energy revolution.
This is because the metals it specialises in (including copper, nickel, manganese, and iron ore) play a vital role in the transition to green technologies. I expect profits to soar as markets move into material deficits, a phenomenon that should push commodities prices much higher from today’s levels.
I also like Anglo American because of its robust balance sheet. A net debt to adjusted EBITDA ratio of 0.9 times gives it scope to boost earnings through project expansions and acquisitions.
