Two bargain FTSE 100 stocks with P/E ratios under 10

Edward Sheldon looks at two FTSE 100 (INDEXFTSE:UKX) stocks trading cheaply.

| 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.

submarine

Image: Public domain. Fair use

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 price-to-earnings (P/E) ratio is the most used ratio in the world of stock market investing. It indicates the amount that investors are willing to pay for one pound of a company’s earnings and is easily calculated by dividing the company’s share price by its earnings per share. For example, if a company generates earnings per share of 50p, and its share price is 500p, the P/E ratio is 10, and indicates that investors are willing to pay 1,000p for a pound of earnings. The beauty of the ratio is that it allows investors to easily compare valuations between companies.

The lower the ratio, the cheaper the stock is, and many consider a P/E ratio of 15 to be an average valuation. However, today I’m looking at two FTSE 100 stocks that currently trade on P/E ratios less than 10.

Babcock International Group

Babcock International (LSE: BAB) is an engineering services company that provides bespoke services to the defence, energy, transport and emergency services sectors. The stock enjoyed a powerful run in the decade between 2004 and early 2014, rising from around 100p to almost 1,300p, however, after announcing a rights issue in early 2014 to buy Helicopter firm Avincis, the stock has struggled, declining almost 40%.

Should you invest £1,000 in Aviva right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aviva made the list?

See the 6 stocks

Shares in the engineering specialist currently trade on a low forward P/E ratio of just 9.7. Is that a bargain or are investors cautious for a reason?

The group released a trading statement this morning, advising the market that “the order book and bid pipeline of opportunities have remained stable, and continue to provide confidence in our ability to grow revenue as expected over the medium term.” Revenue visibility has continued to improve, with 89% of revenue now in place for 2017/18.

With sales growth of 16% expected this year and a prospective dividend yield of 3.6% (covered 2.8 times) on offer, Babcock offers value in my view. The company has a very impressive dividend growth history, having increased its dividend every year since 2000, and with Neil Woodford having a sizeable shareholding in his Equity Income fund, I believe the business is worth a closer look.

Aviva

Also trading on a P/E ratio of under 10 are shares in Aviva (LSE: AV), which look attractive at the current valuation, in my view. The insurance giant released a solid set of interim results in August, with operating profit rising 11%, and operating earnings per share increasing 15% to 25.8p. Chief Executive Mark Wilson triumphantly declared “Aviva is delivering.”

The stock has strong dividend appeal in my opinion, as although Aviva cut its payout in FY2012, it has been increased for the last two years. Analysts expect dividend growth of 13.2% this year, taking the payout to 26.4p. That equates to a prospective yield of a formidable 5.2% at the current share price.

With City analysts forecasting FY2017 earnings of 54.4p, Aviva’s forward P/E ratio of 9.3 looks good value relative to insurance peers Legal & General Group (P/E 10.3) and Prudential (P/E 12.8), and the FTSE 100 forward P/E ratio of 14.8.

Should you buy Aviva now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Edward Sheldon owns shares in Aviva and Legal & General Group. 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

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »

Investing Articles

When will Lloyds shares hit £1?

Lloyds shares have surged over the past 12 months, but where will they go next? Dr James Fox thinks there’s…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Stock-market crash: the meltdown of the Magnificent 7

Just before Christmas, these Magnificent Seven stocks were riding high. But after the worst quarter for US stocks since autumn…

Read more »

Investing Articles

Wow! IAG shares are undervalued by 47%, according to analysts

IAG shares have surged over the past 18 months, but analysts are pointing to more growth. Dr James Fox takes…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

Read more »

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »