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How I identified this dirt-cheap FTSE 100 stock

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I focus most of my investing activity on companies in the FTSE 100. But, how can I determine which stock is the cheapest?

Cheapness is a relative concept. I’m sure Warren Buffett, who is reported to be worth more than $100bn, thinks something costing £1m is cheap. However, to me, that’s enormously expensive.

Buffett is responsible for probably the most famous investment quote of all time: “Price is what you pay. Value is what you get.” Identifying which stocks have the greatest disparity between price and value is the key to investment success.

I’ve looked at three different measures to help identify the cheapest stock in the FTSE 100. I compiled tables for the top 10 in each category.

1. Dividends

A stock’s yield is calculated by dividing the annual dividend by its current share price. In theory, a high yield means a stock is cheap.

Stock Dividend yield (%)
Persimmon 19.3
M&G 9.8
Rio Tinto 9.1
Vodafone 8.8
Barratt Developments 8.7
Taylor Wimpey 8.3
Phoenix Group 8.0
abrdn 7.7
Legal & General Group 7.5
BT 6.9
Data source: Yahoo Finance

But, a generous dividend may not be sustainable. It might also leave a business with insufficient cash for it to grow.

Also, a high yield could result from a loss of investor confidence that is driving the share price down. This probably explains the inclusion of three builders in the top 10.

The directors of Persimmon have recently indicated that they are going to cut the dividend in 2023.

2. Earnings

A low price-to-earnings (P/E) ratio may also indicate value for money. It’s calculated by dividing the share price by earnings per share.

Stock P/E ratio
Melrose Industries 0.1
Segro 2.3
Pershing Square 2.9
3i Group 3.7
Shell 5.0
F&C Investment Trust 5.3
Barclays 5.4
Glencore 5.4
Persimmon 5.5
Mondi 6.6
Data source: Yahoo Finance

It must be remembered that earnings are affected by the application and interpretation of accounting standards. Cash flow is a better measure but, this too, can be affected by one-off events.

BP is a good example of this. It doesn’t feature in the top 10 because it made a loss of $13.3bn in the nine months to September 2022, despite having an operating cash inflow of $27.4bn.

3. Assets

It’s also possible to take an asset-based approach to identifying cheap shares. Dividing the share price by the assets per share of the company gives the price-to-book ratio.

Stock Price-to-book ratio
Barclays 0.38
Standard Chartered 0.44
Vodafone 0.49
abrdn 0.54
The British Land Company 0.56
Land Securities Group 0.61
Segro 0.63
J Sainsbury 0.64
Lloyds Banking Group 0.66
Kingfisher 0.68
Data source: Yahoo Finance

This measure favours companies that are more capital-intensive. Banks also fare well using this metric.

Which is the cheapest?

Interestingly, five companies appear on two of the lists. abrdn comes the closest to appearing on all three, as it ranks 15th on the P/E list. I therefore consider this stock to be the cheapest in the FTSE 100.

abrdn is an investment company with over £500m of assets under management. Its share price has fallen 20% over the past year.

Before deciding whether to invest, I’m going to take a closer look at the company. I want to make sure that some of the anomalies referred to above don’t apply.

The post How I identified this dirt-cheap FTSE 100 stock appeared first on The Motley Fool UK.

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James Beard has positions in Lloyds Banking Group Plc, Persimmon Plc, and Vodafone Group Public. The Motley Fool UK has recommended Barclays Plc, British Land Plc, J Sainsbury Plc, Land Securities Group Plc, Lloyds Banking Group Plc, Melrose Industries Plc, Standard Chartered Plc, and Vodafone Group Public. 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.