Britain is known for many things but being cheap is not one of them. In fact, it is a rather expensive place to live on many accounts. London consistently ranks amongst the worlds most expensive cities year after year. But one aspect of London is cheap at the moment, the shares listed on its stock exchange.
Britain is a cheap place to go shopping for stocks. Valuations of British stocks are cheap relative to other foreign markets.
I am not talking about the market as a whole i.e. the FTSE100. The reason the market taken in aggregate is cheap is because it is full of all ‘old economy’ stocks. Having said that CAPE ratio of the FTSE 100 is 12 so it’s still cheap on a historical context as its average CAPE has been 16. Instead I am talking about individual stocks.
Stocks in companies listed on the London Stock Exchange have lower valuation ratings as compared to their US counterparts. Unilever vs Procter & Gamble. Shell vs Exxon Mobil. RB vs Clorox. BP vs Chevron. BAT vs Phillip Morris. Diageo vs Brown Forman. The list goes on and on. No wonder many companies are considering a secondary listing on the US markets. Britain seems unloved. And stocks on the markets here are truly in the dumps.
Not that I am complaining though. If there are two companies with similar quality operating in the same industry, I would rather own shares of the lower valued one.
That is why I don’t mind that London listed stocks are not flying higher and taking part in the ‘melt up’. It gives me a chance to snap up shares in quality companies at lower prices. It gives me a chance to fish where the fish are. The added advantage of buying into these British firms is that I don’t have to worry about things like dividend withholding taxes! So let Britain stay cheap.
August stock purchases
The following are stocks I bought using my monthly stock purchase programme during the month of August:
- BT – Bought 142 Shares at £1.01 each
- ABF – Bought 9 Shares at £18.6 each
- BAT – Bought 38 shares at £24.88 each
- IMB – Bought 13 shares at £12.60 each
- BAG – Bought 47 shares at £4.22 each
- PZC – Bought 78 shares at £1.87 each
- RDSB – Bought 17 Shares at £11.23 each
The above purchases have added £112 in dividend income to my portfolio. My portfolio as a whole is now expected to generate £3,886 in dividends every year.
The only stock from the above list that doesn’t pay a dividend is BT. The telecom company has decided to cut its dividend to nill for the time being with the intention of reintroducing it in 2022. I personally think this is a prudent move as it will give BT the necessary funds needed to continue rolling out its infrastructure and play an even bigger part in todays interconnected world.
As an aside, there has been recent talk of a takeover of BT but I don’t believe this will happen due to the strategic importance of BT to this nations infrastructure. With monopolistic highly cash generative assets such as Openreach, BT has hidden gems lurking in its conglomerate structure. I have written before on the hidden value of UK conglomerates and BT is a company that would fit this bill.
The fall in BT like many other FTSE heavyweights can attributed to income investors, especially income funds, selling out. For income funds, it is in their mandate to invest in equities that pay a dividend so once a cut comes, they become forced sellers. This is why I believe BT is severely undervalued at the moment as the big investors are staying away not because they think it’s a bad investment, but because they are unable to invest in a company that doesn’t pay a dividend.
Therein lies our opportunity as small individual investors. We don’t have such mandates. We are not governed by strict codes. We don’t need to sell low and buy high. We can choose to buy shares in companies when we want. We can buy when companies are hated and valuations are in the dumps. We can buy on the cheap. We don’t have limitations. This is our edge. And hopefully this will give us above average returns for the long haul.