FTSE 100 blue chips Aviva (LSE: AV) (NYSE: AV.US), BAE Systems (LSE: BA) and Centrica (LSE: CNA) look attractively valued right now. They also demonstrate some useful general lessons on investing in the stock market.
It often seems to be the case that a chief executive promoted from within struggles to get a troubled company back on track. An outsider can find it easier to take the difficult decisions that are often necessary for the good of the business.
Avivas finance director, Andrew Moss, was promoted to chief executive shortly before the company went into a tailspin as a result of the global financial crisis. When other insurers began to recover, Aviva continued to languish. Moss walked the plank after an investor revolt over his pay packet. Step forward Mark Wilson, who had not only navigated Hong Kong-based insurer AIA through the financial crisis, but transformed the firm into the leading pan-Asian insurance company.
Wilson is now working his magic at Aviva. The shares have climbed 75% since he first laid out his turnaround plans in March 2013, but still trade on a modest forward price-to-earnings (P/E) ratio of 11.3 at a recent share price of 553p.
When unveiling Avivas annual results earlier this month, Wilson said of the turnaround: we have further to travel than the distance we have come. This suggests plenty of upside ahead. And theres additional potential from Wilsons gambit of a takeover of rival Friends Life, which has recently been backed overwhelmingly by Avivas shareholders.
The earnings record of defence firm BAE Systems is a little off-putting.
|EPS growth (%)||-2.2||+14.6||-15.1||+8.5||-9.5||+3.4|
Earnings per share (EPS) have been up and down like a fiddlers elbow and thats the smoother underlying earnings; the oscillations of statutory EPS have been even more extreme.
Investors are most comfortable with nice, steady EPS growth, year after year. However, government defence procurement cycles, big contracts, sometimes lumpy payments and delays dont naturally lend themselves to a smooth earnings trajectory. With a business such as BAE we have to accept EPS may be variable.
But if we look at the bigger picture, defence spending isnt going to dry up any time soon (if ever!), BAE has an order book of over 40bn, and the company trades on a forward P/E of 13.5 at a recent share price of 532p. A dip in the shares on a bit of bad news a big contract delay, or suchlike would be nice; but, even BAEs current valuation is below the FTSE 100s long-term average forward P/E of 14.
Regulated utilities, such as Centrica the owner of British Gas are considered to be among the steadiest companies on the stock market. But recent events within, and around, Centrica serve as a reminder that all equity investment comes with risk.
Around 60% of Centricas assets are in the UK, 25% in North America, with the remainder mainly oil and gas assets in Norway. During the past year, Centricas UK business suffered from record mild weather, its North American business from extreme cold weather, and its upstream business from falling oil and gas prices.
In addition to tough trading conditions resulting in the dividend being cut by 30% there is political uncertainty regarding a possible shake-up (or even break-up) of the UKs Big Six energy companies. Centricas shares have fallen by 25%.
At a recent price of 258p, the companys market capitalisation is 12.8bn. Adding net debt of 5.2bn gives us a theoretical takeover value of 18bn. For that price an acquirer would get total assets of 22.7bn. So, theres good asset backing for the current share price, and with a dividend yield of 4.7% despite the 30% cut in the payout Centrica could be a good candidate for the profitable (but not risk free) strategy of buying fundamentally decent businesses when theyre unloved by the market, and holding them and reinvesting the dividends for the long term.
Over long periods of time, history shows that the returns from investing in equities knock spots off the returns of other assets, such as cash and bonds. Indeed, aspiring to build yourself a million-pound shares portfolio isn’t pie-in-the-sky, if you’re prepared to invest for long enough.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.