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Here’s why I bought these cheap FTSE 100 shares for my portfolio

Front view photo of a woman using digital tablet in London
Front view photo of a woman using digital tablet in London

The FTSE 100 ended its best week in almost two years last Friday. Its weekly rise of 4.1% was the best since January 2021. However, the blue-chip index has been volatile recently, presenting some good buying opportunities. I capitalised on one such chance recently, snapping up these FTSE 100 shares while they were down.

Established financial services provider

Legal & General (LSE: LGEN) has been around since 1836. It specialises in investment management, mortgages, pensions, annuities and life assurance. This is a highly profitable business with a return on equity (ROE) of around 20%.

It has maintained or increased its dividends for many years. In fact, a £1,200 investment in Legal & General stock five years ago, with dividends reinvested, would now be generating me over £100 a year in passive income.

Legal & General Dividend

Year ending

Dividend (per share)

2023 (forecast)

20.50p

2022 (forecast)

19.40p

2021

18.45p

2020

17.57p

2019

17.57p

2018

16.42p

2017

15.35p

Recent volatility

The company’s shares plunged last month after there was massive volatility in UK government bonds caused by the mini-budget debacle. This led investors to worry about Legal & General’s pension fund-related liabilities. The stock actually fell nearly 20% in just one week.

However, the company promptly released a statement saying that it had not been a forced seller of UK government bonds. Management added that the firm holds “considerable buffers” over capital and liquidity requirements, enabling it to “withstand shocks like we have seen in the past few days”.

The firm reiterated its guidance for full-year operating profit of about 8% and capital generation of £1.8bn.

After this reassurance, the shares shot back up. I actually had the good fortune to invest in it while it was down.

Cheaply valued

The stock has a price-to-earnings (P/E) ratio of 6.9, which is well below the current P/E of the wider index (around 13). It offers a prospective dividend yield of 8.5%, with dividend cover of 1.8.

The cover ratio is a popular tool for investors to gauge the safety of a dividend. It measures the number of times that a company can pay its current level of dividends to its shareholders.

As a rule of thumb, dividend cover above two is generally considered safe. Personally, I don’t like to see anything below 1.4, but each dividend warrants its own considerations. Anyway, that figure of 1.8 seems fine to me, especially as the company is due to carry on increasing its earnings.

Risks

There remains a risk that as inflation and interest rates continue to rise, we could see further volatility in the share price. And the Bank of England is now warning that a UK recession is not just inevitable, but could be the longest in 100 years. Legal & General has all sorts of financial exposure to the UK economy. So investor appetite for the stock could fall sharply.

However, I actually plan to take advantage of any more dips in the share price to add to my position. Not only do I consider the dividend to be very safe, I also think the income paid out by the company will (eventually) grow faster than the rate of inflation. Over the long term, this should help strengthen my purchasing power.

The post Here’s why I bought these cheap FTSE 100 shares for my portfolio appeared first on The Motley Fool UK.

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Ben McPoland has positions in Legal & General Group. 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 2022