The UK’s leading companies have almost doubled in value since the financial crisis, with the FTSE 100 index now collectively worth 93.5% more than it was at the market trough in early March of 2009.
After such a rally, it’s not hard to understand why Morningstar’s quantitative equity data points to the UK market as fairly valued at present. Indeed, the FTSE All Share’s market value is currently 5% above what our own data implies it is worth. Yet there are still opportunities to be had, even amongst large-cap stocks.
Ten FTSE 100 companies under Morningstar analyst coverage currently boast a 4-star rating, implying the market is not fully appreciating their intrinsic worth.
Of the 10, three are banking stocks, three are consumer defensive stocks, two more are miners, one is an oil exploration company, and the final is a utility provider.
Morningstar equity analyst ratings measure the difference between the market price of a stock and our analyst’s fair value estimate, based on a free cash flow valuation model, with one star representing an overvalued stock and five stars an undervalued stock. There are currently no five-star UK stocks under coverage, while the only one-star stocks are medical devices firm Smith & Nephew (SN.) and utility provider United Utilities (UU.).
Of the ten stocks that look comparatively cheap, three are offering current dividend yields in excess of 5% thus offering decent income as well as value. Centrica is the top payer, with a dividend yield of 5.32%, followed closely by Vodafone at 5.31% and then Tesco at 5.11%. The weakest link in terms of income is Lloyds, but we believe it will pay a dividend in 2014 and management has hinted heavily that it aims to return up to 70% of earnings through dividends.
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