Famed investor and mega-billionaire Warren Buffett wrote this in his 2008 letter to Berkshire Hathaway shareholders: “Price is what you pay. Value is what you get.” Like almost all of the Oracle of Omaha’s quips and quotes, I love these wise words. They remind me that my goal as a value investor is to buy shares in quality businesses at fair prices. So I’ve recently been hunting down cheap FTSE 100 shares, of which I’ve found dozens.
For example, here’s one Footsie share that my wife recently bought at a low price with the goal of generating bumper returns in future. Of course, no gains are guaranteed and share prices can fall as well as rise. Even so, I’m pretty confident that we bought into this FTSE 100 stock at a sensible price.
My cheap FTSE 100 share is Barclays
In late June, my wife finally bit the bullet by buying shares in big bank Barclays (LSE: BARC). Immediately, the share price dived, but it has since rebounded strongly during July’s global market rally. As a result, she’s sitting on a modest early paper profit on her stake in the bank.
One reason we bought shares in Barclays is that, unlike several of its British peers, the bank still operates a sizeable US investment-banking division. Although earnings from this arm can be variable and volatile, this does give Barclays exposure to occasional booms in corporate and capital markets worldwide.
The second reason we bought into this FTSE 100 firm is that its shares weakened markedly in the first half of 2022, as shown below:
| Five days | 4.2% |
| One month | 12.6% |
| Six months | -17.5% |
| 2022 YTD | -9.1% |
| One year | -8.9% |
| Five years | -14.7% |
Furthermore, Barclays shares have lost almost 15% of their value in the past half-decade (all returns exclude cash dividends). Following its 2022 decline, this stock now trades on a price-to-earnings ratio of 5.8 and a corresponding earnings yield of almost 17.3%. This is one of the highest earnings yields in the whole FTSE 100 index. This suggests to me that Barclays stock may be far too cheap right now.
The third reason we decide to bet on the company is that it offers a trailing dividend yield of 3.6% a year. While this is slightly below the FTSE 100’s yearly cash yield of around 4%, there’s scope for considerably higher payouts in the future. After all, Barclays’ dividends are covered almost 4.7 times by earnings, which looks like a huge margin of safety to me.
I have high hopes for Barclays’ future
My wife bought into this business hoping that Barclays has a bright future post-Covid. However, many factors could harm the bank’s share price in 2022-23. These include red-hot inflation (driven by soaring energy prices) hitting disposable income, rising interest rates cooling down the housing market, weaker business and consumer confidence, and the war in Ukraine. And let’s not forget the growing risk of an economic downturn and even a full-blown recession.
Due to these many risks, I’m expecting this Footsie share to be fairly volatile over the next 12-18 months. But 10 years from now, I’m hoping for bumper returns from buying Barclays!