At 7,338 points, the FTSE 100 has gained only 45% over the past 10 years. And since 2015’s highest point in May that year, our top index has risen by a paltry 3.5%. That’s a lousy performance, and it’s clearly tied up with the almost interminable Brexit wrangling that has been lurching us between uncertainty and confusion.
Bed and Brexit
Hopefully Brexit is finally going to be put to bed, with the biggest likelihood in my view being a working majority for the Conservative Party allowing Boris to get his recent deal passed without having to further appease the Ulster Unionists.
It would be easy to just suggest that the end of Brexit uncertainty will see an upturn in the FTSE 100, and 8,000 points and all that… whoopee. But I want to put some numbers on it and see how it would all tie in with the valuations of some key stocks.
The weakness of the FTSE 100 in recent years has raised dividend yields. That’s inevitable when companies continue to perform well enough to keep lifting their dividends while their share prices remain depressed, but the current overall 4.8% on the cards for 2019 is quite remarkable.
Even two years ago the index’s yield was down at 4.2%, which was still good compared to longer-term returns. To just return to that level suggests FTSE 100 share prices would need to rise by around 14%, lifting the index well above 8,000 points to 8,386. Even a level of 8,000 would represent a 9% increase, so what would that leave our top companies looking like? Let’s examine a few.
Royal Dutch Shell shares are on a forward P/E of 10.6 based on 2020 forecasts, with a dividend yield of 6.5%. Whatever you think of global warming and the need to move away from fossil fuels, we’ll be seeing strong demand for oil for some years yet, and I think Shell shares are cheap. The 9% rise needed to take the Footsie up to 8,000 points would raise Shell’s 2020 P/E to 11.6 with the dividend yield down to 5.9%, and I’d say that’s still good value.
Our depressed banks? They’re the hardest hit by Brexit, with possibly the most to gain from a softer negotiated exit. I’ll pick my favourite, Lloyds Banking Group, which is currently valued on a 2020 P/E of 8.3, way below the index average, and a predicted 2020 dividend yield of 6%. I still expect tough days ahead, but an 8,000 point Footsie would imply a P/E for Lloyds of 9.1 and a dividend yield of 5.5%. In my view, that would still be a significant undervaluation.
Insurance companies have been hit, including Legal & General whose shares are currently on a forward P/E of only 8.5 and whose dividend yield stands at 6.8%. Under an 8,000 point Footsie we’d be looking at a P/E of 9.2 and a dividend yield of 6.2%. I can’t see insurers as deserving the banking fallout, and I’d still see that valuation as crazily cheap.
I could examine plenty more, like housebuilder Taylor Wimpey with a P/E of 8.4 and a forecast 2020 dividend yield 10.6%, but I think the picture would be the same — depressed shares that would still look undervalued with the FTSE 100 at 8,000 points.
I reckon the 8,000 level could be broken early in 2020, and I’m predicting closer to 9,000 by year-end.
Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019