If you ask me when is the best time to buy UK shares, my answer is always the same: now. But I do think there are times when the UK stock market offers better value than others. And I see a number of indicators that convince me that we’re in such a time today.
Dividend yields
First up is my favourite investing measure, dividend yields. AJ Bell has recently published its latest Dividend Dashboard, which surveys the current state of FTSE 100 dividend forecasts.
For 2022, analysts are expecting the total value of FTSE 100 dividend cash to reach around £85bn. That’s just a shade short of the all-time record of £85.2bn set in 2018, before Covid.
It’s so close, there must be a good chance that 2022 could set another new record. And it’s in a year beset with soaring inflation, rising interest rates, global infrastructure problems, and general pessimism.
This forecast would put the overall FTSE 100 yield at 4.2%, with cover by earnings looking very healthy this year. It’s been a while since I’ve seen such a potentially exciting year for dividend investors.
Share buybacks
It looks like we could also be in for a year of record share buybacks. So far, the FTSE 100 appears on track to beat the £34.9bn returned that way in 2018.
As well as adding to the total amount of cash coming from dividends, it says one other thing. The surplus capital could be redistributed as one-off special dividends. But if a company prefers a buyback, it suggests it sees its own shares as good value right now.
Shell had already been buying back its own shares since February. And then on 28 July, it announced a new $6bn buyback programme which should be complete before its Q3 results in October.
Other big UK companies hoovering up their own shares this year include Aviva, British American Tobacco, and BP. Even the depressed banking sector is doing it, with Barclays, Lloyds, and NatWest all getting in on the act.
There are other considerations, but we surely wouldn’t be seeing record buybacks if companies thought all these UK shares were currently overvalued.
P/E ratio
At the moment, the FTSE 100 is on an overall price-to-earnings ratio of almost bang on 14, on a trailing basis. And various estimates put it down around 12-13 on the basis of forecasts. That’s below its long-term average. The index has been gaining a little in 2022. But crucially, FTSE 100 shares look to be well below their P/E valuations from prior to the arrival of Covid.
That’s even though company earnings are on their way back up as we emerge from the pandemic. It sounds like share prices have not yet caught up with the trend.
I’m sure a lot of it is due to the economic uncertainty we face, and the fear it creates among institutional investors.
But right now, with the sizes of 2022’s likely dividend payouts and share buybacks, I reckon UK shares look undervalued.