When I recently filtered some stocks looking for cheap UK shares, I was surprised to see two FTSE 100 companies appear. One was Barclays, the other was insurer Aviva.
Both shares have a forward P/E below 12 and a book value of less than 0.8, which to me makes both shares very cheap. Other companies to pass this simple screen of low P/E and low price-to-book ratio were Just, Georgia Capital, Hansa Investment and Arix Bioscience.
One of the best cheap shares
Barclays is a share I’ve liked for quite a while. Banks seem well placed to benefit from an economic recovery this year, from the economy reopening and from any potential increase in interest rates. Yet recently the shares have been falling, although not significantly. That could represent an opportunity to add to my portfolio.
With banks also reintroducing their dividends this year, following their suspension because of coronavirus, there’s a lot to like. Barclays, as well as being cheap, has a dividend yield of over 4% on a one-year rolling basis. The dividend should bounce back strongly, so it’s good for income.
With Barclays having seen off an activist investor, operating in both the US and the UK and rebounding after the pandemic, I think future share price growth could be on the cards.
But while there’s much to like about Barclays, banks are always sensitive to the economy. If that deteriorates, bank share prices will likely fall furthest. Also, interest rates may not rise, as some think the spike in inflation is “transitory”.
Given the cheap share price, coupled with the improving backdrop economically for banks, I’m tempted to add Barclays to my portfolio.
Aviva is a cheap UK share
Aviva is another share that could be set for good times ahead, especially given how cheap the shares are. The forward P/E of Aviva shares is only eight. Other ratios also show the shares are cheap. For example, the price-to-sales ratio is 0.33,
Like Barclays, Aviva is also good for income-seeking investors. It has a dividend approaching 7%. That’s well above average for the FTSE 100.
Revenue is forecast to be healthy, going from an estimated £22.6bn in 2021 up to £27bn in 2022.
I think a boost to margins and return on equity should be the focus of management going forward. Improving these could have a big impact on the share price and investor returns.
My main concerns for the share price are around how successful the turnaround at Aviva will be in unlocking further value. It’s done a lot of hard work and become leaner by selling off international businesses in Europe and Asia. Now I think investors will want to see better margins, cost-cutting and new growth opportunities.
I already hold Legal & General, so won’t also add Aviva to my portfolio. If I didn’t already have an insurer and asset manager, I’d be very tempted to buy Aviva as a cheap UK share.