At the start of 2020, the FTSE 100 was on a roll. Starting the year around 7,542 points, the index climbed to 7,575 by 17 January. Then coronavirus crashed the markets, with the FTSE 100 collapsing below 5,000 on 23 March. Today, with the index hovering around 5,860, there are still plenty of cheap shares lurking in the Footsie.
Cheap shares abound in the FTSE 100
When hunting for cheap shares in the UK market, it’s important to remember that some shares are cheap for good reasons. For example, many retail stocks have been devastated by the reduced footfall and lower sales caused by lockdowns. Likewise, airlines and aerospace firms have been crippled by huge falls in air miles flown. Also, Covid-19 has battered tourism & travel, leisure & entertainment, and hospitality businesses.
Today, when looking for cheap shares, I focus on companies with the financial strength to push through the current crisis and return to growth. What I’m after is sales translating into cash flows that translate into regular dividends for shareholders. In addition, I feel safer with what I call ‘SLR shares’ — stocks that offer Safety, Liquidity and Returns — most of which are found in the FTSE 100.
I like the look of Vodafone
One company that catches my eye is Vodafone (LSE: VOD), the telecoms giant with vast operations spanning Europe and Africa. As well as being a leading player in mobile, Vodafone supplies fixed-line broadband to over 118m European customers. Yet its market value has declined this year to just £30.4bn. This indicates to me that it could have been dumped in the FTSE 100’s bargain bin of cheap shares.
At their 52-week high, Vodafone shares closed at 169.46p on 12 November 2019. During the March market meltdown triggered by Covid-19 lockdowns, they plunged below £1, closing at 98p on 16 March. In the subsequent bounce-back, they peaked above 141p on 8 June, but have been sliding since.
A 7% dividend yield sounds tempting
On Friday, the stock closed at 112.6p, less than 15% above its March low. With Vodafone’s shares down almost a third (30.8%) over the past 12 months, I see them today as almost certainly cheap shares.
Although Vodafone has secure, predictable cash flows, it also had a whopping £38.5bn of debt at end-March (driven up by European acquisitions). Yet the company’s excellent credit rating and yearly free cash flow above £4.5bn means plenty left for shareholders after interest payments.
For me, Vodafone’s main attraction is its hefty cash payouts, which produce a dividend yield of 7% a year. Of course, the yearly dividend could be cut, but even a reduction of a quarter would leave the yield at a market-beating 5.25% a year.
In summary, I’d buy these cheap shares today, ideally in an ISA, to bank the juicy tax-free dividends and potential capital gains. After all, where else could I bank 7% a year in cash in this ultra-low-rate environment?