The safest way to riches is surely to buy shares in quality companies when they can be had for reasonable prices, wouldnt you say? I certainly think so, which is why it puzzles me to see so many investors selling good stocks when theyre down or looking very cheap on fundamentals. Here are three that I think could help set you up for the long term:
Insurance bargain
Shares in Aviva (LSE: AV) ended last week on a 52-week low of 459p, and as I write the price is only back up 2p to 461p. But that leaves them on a forward P/E of under 10 for this year, with a handsome dividend yield of 4.5% predicted. Sure, EPS looks set to drop a bit, but the City is expecting growth in 2016 and for that year, forecasts suggest a P/E of under 9 with a 5.3% dividend yield. So whats wrong?
First-half figures released last month looked good, with a very strong balance sheet showing net asset value up 12% and a rising capital surplus of 10.8bn. CEO Mark Wilson told us that after three years of the firms turnaround plan, The progress is evident in these results.
This strong performance by Aviva must be set against the bearish mood in the investment industry, with pensions reforms leading to a run on annuities and other insurance-based savings products. But long term, the pensions business is expected to do nicely, and I see Aviva as a gem thats been unfairly depressed with the rest of its sector.
Steady cash
British Gas owner Centrica (LSE: CNA) has also suffered a wobble over the past 12 months, with its shares down 28% to 235p. Were in a couple of tight years for earnings, but Centricas reputation for high dividends still looks solid with yields of more than 5% expected this year and next. In real terms, though, the full-year dividend should be cut by around 10% this year, after the first-half payment was reduced by 30% following a decision to rebase it. But we should see cover by earnings of around 1.5 times, which looks healthy enough.
Perhaps the punters are worried that a Labour government led by Jeremy Corbyn will re-nationalise the utilities? But the chance of Labour winning even a raffle under Mr Corbyns leadership seems slim, never mind an election, so theres little to fear there.
Neil Woodford holds Centrica as a core investment, and Im with him on that.
Banking pariah?
Now Ill turn to a share thats had a positive year, Barclays (LSE: BARC), up 12% to 253p. But its still down over two and over five years, and the FTSE 100s arguably strongest bank still looks cheap to me on fundamentals. Dividends are creeping up, and with a strong recovery in earnings predicted, we should see the yield edging up to around 3.5% by 2016 while the P/E drops to under 9 based on 2016 forecasts.
Theres an increasing appetite for punishment over past misdeeds creeping into the thinking of regulatory bodies, and coupled with the weakness of the financial sector generally, that might be scaring people away. But fear usually outstrips reality, and when we look back in 10 years time well surely see the penalties faced by Barclays for the small change they really are. Barclays still looks like a Buy to me, and the Citys tipsters are in firm agreement.
Buying quality shares when they’re at low valuations could even get you to happy millionaire status before you retire.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and 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.