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The FTSE 100 has surged 14% this month, but I’d keep buying these cheap shares!

Cliff D'Arcy
·3-min read
Illustration of bull and bear
Illustration of bull and bear

November has been a very rewarding month for UK shareholders, as share prices soar on two pieces of good news. First, Joe Biden is to be the 46th President of the United States after winning last Tuesday’s election. Second, pharma giant Pfizer and its German biotech partner BioNTech will begin distributing a Covid-19 vaccine before 2020 is out. Thus, the FTSE 100 has risen like a rocket, up 775 points (14%) since Halloween. Yet the UK’s main market index is down almost a sixth (15.6%) in 2020, so I still see value lurking in the Footsie today. Here are two cheap shares I’d buy right now.

Cheap shares: going long on Lloyds

It’s been a bumper November for long-suffering shareholders in Lloyds Banking Group (LSE: LLOY). Lloyds shares have surged by a fifth (20%) to hit 33.66p as I write. At its 2020 low on 22 September, the Lloyds share price had slumped to just 23.59p. Buyers at that price would be sitting on a handsome gain of 42.7% in seven weeks. That’s a remarkable return for so-called ‘boring’ cheap shares that many investors avoided as a perennial ‘value trap’.

Despite this month’s healthy gain, I expect much more to come from Lloyds. Indeed, I still see its stock selling too cheaply right now. Lloyds is the UK’s largest retail bank, with 30 million customers, yet its market value is a paltry £20.2bn. What’s more, Lloyds is in much better shape than it was six months ago. In fact, it made a £1bn pre-tax profit in the third quarter. Furthermore, it has a fortress balance sheet and easily enough excess capital to see it through the Covid-19 crisis. When Lloyds’ suspended dividend returns in 2021, I would expect its stock to soar. That’s why I’d keep buying these cheap shares today.

Banking big dividends from GSK

The second of my cheap shares is one I have owned for much of the past 30 years: GlaxoSmithKline (LSE: GSK). The UK’s second-largest pharmaceutical company is a world leader in vaccines, oncology (cancer), respiratory and HIV/AIDS treatments. At the current share price of around 1,467p, GSK has a market value of £71bn, so it’s a FTSE 100 heavyweight. What’s more, its colossal yearly revenues and cash flow translate into huge quarterly cash dividends for its shareholders. As I wrote recently, GSK’s cash payout is the fifth-largest by size in the FTSE 100. At 80p a share, its quarterly dividends add up to almost £4bn a year — every year, for the past five years.

At today’s price, the dividend yield is a tidy 5.45% a year, far above the 3.2% on offer from the wider FTSE 100. What’s more, GSK’s share price has been crushed by Covid-19, down a hefty 21% from its 2020 peak of 1,857p on 24 January. On a price-to-earnings ratio of 11.7 and an earnings yield of 8.6%, I view the stock as deep in the FTSE 100’s bargain bin. Hence, I’d happily buy more GSK stock at these depressed prices. For the record, I’m already doing so by reinvesting my regular dividends into yet more cheap shares!

The post The FTSE 100 has surged 14% this month, but I’d keep buying these cheap shares! appeared first on The Motley Fool UK.

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Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and 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 2020