It’s been another tough week for global stock markets, with prices falling across the globe. As I write on Friday afternoon, the FTSE 100 index has lost almost 3.1% over five trading days. Meanwhile, across the Atlantic, the S&P 500 index is down nearly 3.7% in a week, while the tech-heavy Nasdaq Composite index has slipped 1.7% since last Friday. But the good news is that falling prices can often mean better value — and that’s why I’m constantly on the lookout for cheap shares to buy.
Finding cheap shares to buy
As a veteran value investor, my filter for finding cheap shares has become quite simple over time. My basic goal is to invest in high-quality, well-known companies with solid earnings and cash flows. And it’s even better when my potential targets’ shares trade on low price-to-earnings ratios (PERs) and offer market-beating dividend yields. Also, because dividends are such a key part of my investment strategy, I tend to confine my stock screens to blue-chip Footsie shares.
3 cheap FTSE 100 stocks
Earlier today, my search for FTSE 100 companies with low PERs and high dividend yields unveiled these three shares that I don’t currently own:
| Company | Industry | Share price | 12-month change | Market value | PER* | Earnings yield | Dividend yield | Dividend cover |
| Abrdn | Asset manager | 165.55p | -41.4% | £3.6bn | 3.6 | 27.8% | 8.8% | 3.1 |
| Barclays | Bank | 158.04p | -11.6% | £26.2bn | 4.5 | 22.2% | 3.8% | 5.8 |
| Royal Mail Group | Postal services | 277.5p | -53.1% | £2.6bn | 4.5 | 22.1% | 6.0% | 3.7 |
I have a confession: while Royal Mail Group is a member of the FTSE 100 for now, it will be relegated to the mid-cap FTSE 250 index on Monday, 20 June. Nevertheless, I have included this stock in my table because it is currently one of my ‘favourite’ value shares.
Presently, the wider FTSE 100 index trades on a price-to-earnings ratio of around 14.1 and an earnings yield of 7.1%. As you can see, the three stocks in the above table have earnings yields around three to four times that of the Footsie. To me, this suggests that the market may be undervaluing their earnings, both current and future.
Furthermore, these three cheap shares all offer decent dividend yields, ranging from 3.8% a year at Barclays bank to 8.8% at asset manager Abrdn (formerly Aberdeen). I also note that these cash yields are covered many times over by earnings, with dividend cover ranging from 3.1 times at Abrdn to 5.8 times at Barclays.
Why would I buy today?
Nowadays, I have a lot to worry about when I review financial markets. There’s the war for Ukraine, red-hot inflation (rising consumer prices, especially energy bills), recent and ongoing interest-rate hikes, new Covid-19 variants and slowing global economic growth. To be honest, all this doom and gloom is almost enough to put me off buying shares altogether.
But then I remember the wise words of Warren Buffett, mega-billionaire and investor extraordinaire. At the height of the 2007-09 global financial crisis, the Oracle of Omaha said, “Be fearful when others are greedy, and be greedy when others are fearful.” And that’s why I’d buy these cheap shares today, despite my personal anxieties about the future!