If I can find what I see as a high-quality business selling at an attractive valuation, I will consider adding its shares to my portfolio. Below are two names from my list of cheap shares to buy now for my portfolio.
I think they are cheap partly because of their price-to-earnings (P/E) ratios. This is a way of valuing companies that many investors use alongside other techniques. Basically it shows how many years of a company’s earnings at their current level it would take to match its market capitalisation. It is far from a perfect measure – for example, a company may have a low P/E ratio but a lot of debt. But I still find it can help me spot undervalued stocks.
Lloyds
Among the cheap shares to buy now I have been considering for my portfolio is the banking company Lloyds (LSE: LLOY). It has a big network in the UK, under its namesake brand as well as other ones such as Bank of Scotland and Halifax. As the country’s biggest mortgage lender, a rising property market has helped propel Lloyds to strong business performance. Earnings per share last year went up to 7.5p. That means Lloyds now has a P/E ratio of 6. I consider that cheap.
It increased its annual dividend last month. The yield is currently 4.2%. So buying Lloyds for my portfolio might offer me two types of return. First, hopefully its continued strong performance could lead to a higher share price. Secondly, I could earn passive income from the dividend.
I do have some concerns, though. An economic downturn is often bad for banks. If there is one in the UK, it could hurt Lloyds’ revenues and profits. With the potential for share price growth and a 4%+ yield, though, I would be happy to tuck more Lloyds shares into my portfolio.
Imperial Brands
Tobacco company Imperial Brands (LSE: IMB) has risen 10% over the past year. But I still do not see its shares as expensive. In fact, I would regard them as cheap shares to buy now for my portfolio. Like Lloyds, it has a P/E ratio of 6.
I also see the potential for both dividends and share price growth at Imperial. The dividend was cut in 2020 but it still stands at a juicy 8.9%. Not many FTSE 100 companies offer a dividend yield in the high single digits like that. The company’s strong cash flows should be able to keep funding it, as long as they continue.
Cheap shares to buy now
After a 60% fall in the Imperial share price over five years, I think its recent positive movement could mark a turning point.
I reckon Imperial’s cheap valuation means there is scope for more share price recovery. But the big risk here, both to the share price and dividend, is the impact of declining cigarette rates in key markets. Price increases can help sustain profits for a while. Both revenues and profits could fall in the long term if Imperial does not compensate for lost cigarette revenues.
With both capital gain and income potential, I happily own Lloyds and Imperial Brands. I would consider buying more shares of both companies at their current prices.