A few years ago, the FTSE 100 showed many signs of being overlooked and undervalued. The price-to-earnings ratio dropped to below 11 at one point – bargain territory! The average dividends were getting close to three time what was on offer on the other side of the Atlantic. While it’s true that the lack of tech stocks was hurting in an era defined by them, the Footsie looked cheap as chips.
What happened next? London’s premier index went on an absolute tear. Three years of impressive growth came along, all the while big dividends were rolling in (though the conflict in Iran has curtailed things a touch). And what’s really intriguing? The index still looks like good value.
FTSE 100 vs S&P 500
Perhaps the best way to demonstrate is through a comparison with the S&P 500. The American index with its tech heavy-hitters is often seen as the top dog. That’s why the following table is revealing indeed.
| FTSE 100 | S&P 500 | |
| P/E Ratio | 16 | 29 |
| Forward P/E Ratio | 13 | 21 |
| Average Dividend Yield | 3.06% | 1.05% |
The long and short of it is that British companies are making more money (relative to the share price) and paying out more in dividends. This was similar to how the numbers looked a few years ago too (although slightly less pronounced).
While it’s true that American companies have better growth prospects, that could be a double-edged sword too. The talk of a bubble in artificial intelligence is one consideration. If a crash does come our way, then the ‘boring’ sectors like banks, commodities and defence that fill up the FTSE 100 could be safe havens for investors.
Worth considering?
And those same ‘dinosaur stocks’ on the FTSE 100 might have a very bright future too. Take £100bn miner Rio Tinto (LSE: RIO) for example. The commodities giant might not be the first name on our lips when it comes to brilliant forward-thinking companies. But I think it could be worth considering.
The green energy revolution is increasing demand for metals like copper, lithium, and aluminium. The new infrastructure for wind and solar power requires tons of these metals and Rio Tinto could take full advantage. The company is one of the world’s leading producers of each of these commodities.
There are risks too, of course. The company’s fortunes are quite entwined with the health of the Chinese economy. That’s because iron ore (its largest metal by sales) has been in huge demand by the country. A downturn could spell trouble.
On the whole? The stock market is too unpredictable to ever be sure of things ahead of time. But on the current numbers, I wouldn’t be surprised to be looking back in a few years’ time and thinking the FTSE 100 was looking undervalued.
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John Fieldsend owns shares in Rio Tinto.
