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A cheap stock to consider buying as the FTSE 100 hits all-time highs

Image source: Getty Images
Image source: Getty Images

The FTSE 100 closed at a record high on Monday 22 April. The UK’s leading stock market index then hit a record intra-day high of 8,076 in early trading on Tuesday 23, topping the previous record of 8,047 set in February 2023.

Does this mean FTSE 100 stocks are now officially expensive? I don’t think so. In fact, I think many of them are still pretty cheap.

Why the FTSE 100 is probably still cheap

Share prices tend to rise over the long term. But company profits also tend to rise over time, at least in line with inflation.

I reckon the relationship between price and earnings is a more useful guide to how expensive the index is than the latest FTSE 100 closing price.

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According to official data, the FTSE 100 is currently trading on a price-to-earnings ratio of about 12, with a dividend yield of 3.8%. This doesn’t seem expensive to me.

Indeed, historical market data suggests that this is probably the lower end of the typical valuation range we’ve seen since 2008. Barring another global crisis or recession, I think many FTSE 100 stocks look pretty cheap.

In the remainder of this article, I’ll take a look at a cheap FTSE dividend share I’d consider buying today, if I had cash to invest.

£2bn cash pile: what next?

British Gas owner Centrica (LSE: CNA) was in poor shape a few years ago but has since enjoyed a strong turnaround. Soaring oil and gas prices over the last couple of years have provided a big boost to profits.

Alongside this, the shakeout in the utility sector – with many smaller suppliers going bust – has also benefited Centrica, I think. Pricing is now more sustainable and there’s less competition for the big players.

This brings us to the situation today. Centrica reported a net cash position of £2.7bn at the end of 2023, alongside record profits.

I admit that I am all in favour of not relying too heavily on debt. I also think it makes sense to keep a strong balance sheet as profits fall back to more normal levels, against an uncertain backdrop.

Even so, I think Centrica will need to do something with some of this cash – either by returning it to shareholders or by investing for the future.

Too cheap to ignore?

Centrica spent £800m on share buybacks and dividends in 2023, with more planned for 2024. Boss Chris O’Shea hasn’t yet revealed any other major plans for the cash.

I can see that committing to long-term investment in the current political environment might not be easy. But I’m a bit worried that the company is focusing too much on short-term share price gains, and not enough on the long term.

Even so, I think Centrica looks a relatively low-risk investment at current levels, given its solid profitability, regulated income, and big cash pile.

Broker forecasts price the stock on seven times 2024 earnings, rising to nine times earnings for 2025. That’s far cheaper than UK utility peers National Grid and SSE, which trade on earnings multiples of 14 and 10, respectively.

I think Centrica shares are probably cheap at current levels and could do well from here.

The post A cheap stock to consider buying as the FTSE 100 hits all-time highs appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 2024