Do these 3 numbers make the FTSE 100 a screaming buy?
Last year was tough for the FTSE 100, with the index falling 12%. After a promising start to 2019 it is fading away and trades at 6,823, at time of writing. Many will be disappointed as the index is now roughly 1,000 points lower than at its peak in May last year.
Others will be wondering if this is a buying opportunity. The following three numbers may give you an indication.
1. Price/earnings ratio
The P/E ratio of a stock or index helps you calculate whether it is good value. It takes the price of a share, and divides it by earnings. A result of around 15 is generally seen to suggest fair value, with anything above that expensive, and below cheap. So how does the FTSE 100 fare on that measurement?
The FTSE 100 now trades at 11 times consensus earnings for the year ahead. That is some way below 15. It is also well below the Shiller P/E for the US S&P 500 index, which currently stands at a hefty 29.05 times earnings.
So by that measurement, the FTSE 100 is good value. It has underperformed global stock markets over the last year or two, and many investors believe it is one of the most undervalued in the world, and due a re-rating if we get some Brexit sense. It could fall lower though.
2. Dividend yield
The FTSE 100 offers a forecast yield of 4.9% for 2019, a stonking rate of income especially at at time when the average savings account pays 0.5% or 1.5% if you shop around.
You also have to remember that you are buying into a rising income and your yield should steadily rise, expressed as a percentage of your initial entry price. Shareholder payouts from the index look set to reach a record high £93.7bn this year. That is a quite astonishing amount of money. Don’t you want to grab a share of it?
3. Foreign exposure
The FTSE 100 is only nominally a British index. Its constituent companies generate roughly 75% of their earnings overseas. This gives you a relatively safe way to invest in the global economy via a tracker fund listed in the UK and priced in pounds.
It also gives you a broad spread of sectors, including oil and gas, industrial goods, automobiles, food and drink, household goods, healthcare, retail, media, travel, telecommunications, utilities and banks.
You have to offset this against the danger of concentration, as the five biggest companies – HSBC Holdings, Royal Dutch Shell (both A & B shares), BP and AstraZeneca – make up 29.07% of the index. Oil and gas alone make up 14.29%.
The FTSE 100 has been a surprise beneficiary of Brexit, which sent the pound plummeting to boost overseas earnings once converted back into sterling. However, that may now be reversing. If we get some kind of Brexit deal, it could accelerate. That would knock the index, although improved investor sentiment could offset that.
To me, the FTSE 100 looks great value with a killer yield. It gives you massive global exposure, albeit with short-term currency risk. Overall, I say it’s a buy. Maybe even a screaming one. Provided you plan to hold for the long term.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca and HSBC Holdings. 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.