It feels like a tough time to be a value investor seeking bargains in the FTSE 100. Just about every value share I’ve identified recently has continued to decline in price.
This reminds me of the dotcom boom and bust at the turn of the century, when good shares were sold in favour of buying ‘new economy’ stocks. And we all know how well that turned out.
FTSE 100 value shares are out of favour
Billionaire investor Warren Buffett once remarked: “In the short run, [the market] is a voting machine; in the long run, it’s a weighing machine.”
In other words, shares get buffeted about (pun intended!) by short-term buying and selling. But long term, FTSE 100 valuations should depend largely on corporate earnings. The higher a company’s earnings climb, the more valuable it should become (in theory, if not always in practice).
This FTSE 100 share is still struggling
As a result of this short-term voting and market irrationality, large disconnects often emerge between market valuations of FTSE 100 companies and their underlying economic worth. This when value investors can pounce.
For example, I’ve written repeatedly of late about oil supermajor BP (LSE: BP). Its shares have taken so many knocks recently that BP might be an acronym for ‘battered price’.
For example, at 10am on Wednesday (just two days ago), this FTSE 100 giant’s shares traded at 314.6p. As I write, they have dived to 288.2p. That’s a drop of 26.4p (8.4%) in just over 48 hours.
To put this price decline into context, BP was worth £65.2bn on Wednesday morning. Now it is worth £59.7bn. This means that £5.5bn of BP’s market value has evaporated in just two days. That’s a loss greater than the individual valuations of 24 different smaller FTSE 100 members. Ouch.
BP actually stands for ‘bargain price’
When I look across to the US, I see the Nasdaq tech index hitting all-time highs and the S&P 500 index within 1% of its record high in January. Sadly, I also see that more than 1,000 Americans are dying each day from Covid-19. This makes me wonder whether I’ve gone mad, or whether the rest of this crazy world no longer cares about stock valuations.
Meanwhile, I keep looking for FTSE 100 companies with low valuations based on earnings, decent cash flows, dividends yields, and strong balance sheets. BP fits the bill for several of these value criteria.
Today alone, BP shares are down more than 7p (2.4%) and they have crashed by almost half (43%) in the past 12 months. During March’s market meltdown, they plunged to a low of 222.9p, a price not seen since 1995 – a quarter-century ago.
Yet back on 17 September 2019, BP shares hit their 2019/20 peak of 532.6p, which is 85% above today’s level. Wow.
I’d buy BP for dividends and future growth
At under £60bn, I refuse to believe that the market has fairly and correctly valued BP’s future. Its last four quarterly dividends totalled 32.67p, for an 11.3% historic dividend yield. However, BP has since halved its latest quarterly dividend to 5.25c (4.01p). Annualised, this comes to 16.04p, for a rebased and sustainable future dividend yield of 5.6%. BP’s next dividend will be paid on 25 September to shareholders on 13 August.
In summary, I would BP buy now for its yearly cash payouts of 5.6%, hold the share, and wait for profitability to return and capital growth to follow.