There are mean Cheap FTSE 100 shares available on the back of the Covid-19-induced market slump. Despite a partial recovery, the FTSE 100 is still below its level of a year ago. That’s why I intend to pick up bargain shares now in the hope of drawing a passive income from the dividends for years to come.
Cheap FTSE 100 shares I like
Both the shares I’d pick to boost my portfolio are ‘defensive’. They’re BAE Systems (LSE: BA) and Tesco (LSE: TSCO). I think that can do well in the long term, given that their products or services (defence and groceries respectively) should always be in demand, no matter what’s happening in the economy.
BAE Systems has a dividend yield approaching 5% and the shares trade on a price-to-earnings ratio (P/E) of 10. The P/E is the ratio of the share price to the company’s earnings per share. It can be used to assess whether companies are good value. BAE’s reading of 10 indicates good value to me.
Looking at its financials, revenue has increased from £16.8bn in 2015 to £18.3bn in 2019. And operating profit went from £1.4bn to £1.7bn. So there’s steady growth at the defence company.
It has high barriers to entry given its strong government relationships and the cost of capital to set up a defence manufacturing firm. This means I’m confident it can continue to be a steady performer, whatever happens to the UK and global economy. It looks to me to be cheap and able to provide a passive income for my portfolio.
I’d be concerned though if ESG investing means institutional investors shun the shares. Another risk of course is the company’s reliance on a small number of countries’ defence budgets.
A much improved business in recent years
Under the previous CEO, Tesco became a much steadier and better business than it had been, in my opinion. It’s become more UK-focused and expanded here with the acquisition of wholesaler Booker in 2017.
The shares are on a P/E of 13 I think they look cheap. On top of that, when it comes to the income the shares will generate, the dividend yield is just under 4%. And this month the grocer will also be paying a large special dividend to shareholders.
There’s also a relatively new CEO at the helm, which could in itself provide a boost for the shares.
It’s not entirely without risk, as that relatively low P/E indicates. I feel the biggest danger for investors remains the threat of margin-crushing price wars. There’s also the issue of discounters continuing to take market share from Tesco and preventing it from getting back to the kind of margins it enjoyed a decade or so ago.
Be wary of value traps
As always, when it comes to shares that appear cheap, I’m wary. They can be value traps, which means a share is cheap because the business is out of favour with investors as its future looks uncertain. Even an already cheap share price can continue to slide, so value investing isn’t without its risks.
Value investing may not be everyone’s favoured strategy, but I intend to add these two cheap FTSE 100 shares to my portfolio and hope they steadily grow over the next few years.