From 17 to 27 October, the FTSE 100 index dropped 5%, but has risen 1.7% over the last five trading days. Despite this modest comeback, I regard the index as among the cheapest in global markets, both historically and geographically.
Indeed, if I had the necessary £1.85trn to hand, I’d buy the entire Footsie outright today. That’s because it trades on a lowly multiple of 10.9 times earnings, delivering an earnings yield of 9.2%. Thus, the Footsie’s dividend yield of 4% a year is covered a healthy 2.3 times by earnings.
Two bargain-basement buys
While this blue-chip index looks far too low today, there are even bigger bargains lurking within it. For example, I count at least 10 stocks that offer cash yields above 8% a year. Wow!
Should you invest £1,000 in Legal & General right now?
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What’s more, here are two undervalued shares in well-established financial firms that my wife and I bought for their delicious dividends and potential for capital gains.
#1: Legal & General
Legal & General Group (LSE: LGEN) is one of the UK’s largest and oldest asset managers and insurers. Founded in 1836, it has been in business for 187 years. Today, the group manages assets worth £1.3trn for 10m clients.
While working in the financial sector for 15 years, I became a great admirer of L&G. Hence, my wife and I bought shares in L&G in July 2022, paying 246.7p a share. Alas, the share price has been weak since its 2023 peak in early March.
On Friday, 3 November, L&G shares closed at 222.7p, valuing this business at £13.3bn. To me, that’s far too low a price tag for such a brilliant business. And though the share price is down 3.7% over one year and 15.1% over five years, these returns exclude hefty dividends.
Currently, this undervalued stock offers a dividend yield of 8.8% a year. That’s 2.2 times the cash yield of the wider FTSE 100. Therefore, while we sit back and wait for L&G’s share price to recover, we’re banking nearly 9% a year.
#2: M&G
My second cheap share, M&G (LSE: MNG), has lots in common with Legal & General. Both companies are asset managers, helping a wide range of institutional and individual clients.
When global markets are healthy and rising, the share prices of these financial firms tend to do well. But when stocks and bonds take a beating — as happened in 2022 — their shares suffer.
At its 52-week high, this one peaked at 229.9p on 2 March. But then the US banking crisis sent financial stocks plunging. By 20 March, M&G’s shares had hit a low of 168.35p. Yikes.
On Friday (3 November) M&G shares closed at 202.6p, valuing the group at £4.8bn — a FTSE 100 minnow. Meanwhile, the dividend yield has leapt to a handsome 9.8% a year — one of the very highest in the London market.
For me, both stocks are outstanding dividend buys at present. That said, future dividends are not guaranteed, so they can be cut or cancelled at any time. Also, both L&G and M&G could be hit hard in Mr Market’s next meltdown.
Even so, I fully expect to hold on to these FTSE 100 shares for many years to come. And if I had any investable cash, I’d buy more of both stocks right away!
