A cheap stock to consider buying as the FTSE 100 hits all-time highs

Roland Head explains why the FTSE 100 probably isn’t expensive and highlights a cheap dividend share to consider buying today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 closed at a record high on Monday 22 April. The UK’s leading stock market index then hit a record intra-day high of 8,076 in early trading on Tuesday 23, topping the previous record of 8,047 set in February 2023.

Does this mean FTSE 100 stocks are now officially expensive? I don’t think so. In fact, I think many of them are still pretty cheap.

Why the FTSE 100 is probably still cheap

Share prices tend to rise over the long term. But company profits also tend to rise over time, at least in line with inflation.

I reckon the relationship between price and earnings is a more useful guide to how expensive the index is than the latest FTSE 100 closing price.

According to official data, the FTSE 100 is currently trading on a price-to-earnings ratio of about 12, with a dividend yield of 3.8%. This doesn’t seem expensive to me.

Indeed, historical market data suggests that this is probably the lower end of the typical valuation range we’ve seen since 2008. Barring another global crisis or recession, I think many FTSE 100 stocks look pretty cheap.

In the remainder of this article, I’ll take a look at a cheap FTSE dividend share I’d consider buying today, if I had cash to invest.

£2bn cash pile: what next?

British Gas owner Centrica (LSE: CNA) was in poor shape a few years ago but has since enjoyed a strong turnaround. Soaring oil and gas prices over the last couple of years have provided a big boost to profits.

Alongside this, the shakeout in the utility sector – with many smaller suppliers going bust – has also benefited Centrica, I think. Pricing is now more sustainable and there’s less competition for the big players.

This brings us to the situation today. Centrica reported a net cash position of £2.7bn at the end of 2023, alongside record profits.

I admit that I am all in favour of not relying too heavily on debt. I also think it makes sense to keep a strong balance sheet as profits fall back to more normal levels, against an uncertain backdrop.

Even so, I think Centrica will need to do something with some of this cash – either by returning it to shareholders or by investing for the future.

Too cheap to ignore?

Centrica spent £800m on share buybacks and dividends in 2023, with more planned for 2024. Boss Chris O’Shea hasn’t yet revealed any other major plans for the cash.

I can see that committing to long-term investment in the current political environment might not be easy. But I’m a bit worried that the company is focusing too much on short-term share price gains, and not enough on the long term.

Even so, I think Centrica looks a relatively low-risk investment at current levels, given its solid profitability, regulated income, and big cash pile.

Broker forecasts price the stock on seven times 2024 earnings, rising to nine times earnings for 2025. That’s far cheaper than UK utility peers National Grid and SSE, which trade on earnings multiples of 14 and 10, respectively.

I think Centrica shares are probably cheap at current levels and could do well from here.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »