LONDON -- Market declines present opportunities to pick up great shares at bargain prices. The FTSE 100 is down 5.3% in the last month. Could it be time to start buying blue-chip shares again?
I trawled the market to find FTSE 100 shares trading within 7% of their 52-week lows. Some are trading near multiyear lows.
Market Cap (millions of pounds)
|Royal Dutch Shell||2,098||7.8||5.3%||131,313|
|Wm. Morrison Supermarkets||256||9.5||4.6%||6,174|
The challenge for anyone researching these shares is deciding whether they are undervalued. If so, you might expect a bounce-back and some nice dividends along the way. However, if the company is entering a genuine decline, buying the shares could damage your wealth.
1. Royal Dutch Shell
The Anglo-Dutch oil giant Royal Dutch Shell is a genuine stock market titan.
Shell's shareholder dividend has not been cut since the end of World War II. According to Capita's Dividend Monitor report, in 2011 Shell paid a total of 6.7 billion pounds in dividends to shareholders. No other FTSE 100 company managed to pay as much.
Thus far, Shell has declared three quarterly dividend payments of $0.43 per share. This suggests that the company may be on track to pay $1.72 of dividends for the full year. That would represent a 2.4% advance on 2011's total payout of $1.68. Analysts forecast another small rise in 2013. On the earnings front, profit is expected to dip slightly this year before rising 5% in 2013.
This means Shell is trading on a prospective 2013 yield of 5.4% and a 2013 price-to-earnings ratio of just 7.5. Only in the very depths of the financial crisis did the shares offer better value.
2. Wm. Morrison Supermarkets
Tesco is not the only supermarket that has endured a tough 2012.
According to market researchers Kantar Worldpanel, Wm. Morrison Supermarkets now has 11.4% of the U.K. grocery market. One year ago this was 11.8%. This decline is affecting expectations of Morrison's profitability. This time last year, the broker community was estimating that Morrison would report earnings per share of 29 pence for 2013. Now, this figure has fallen to 27.1 pence.
As profit forecasts have declined, so has the rating that the market awards Morrison's shares. One year ago, shares in Morrison were 310 pence. That year, Morrison reported EPS of 26.1 pence. That's a P/E of 11.9. Now, Morrison trades on just 9.5 times forecast profits.
Nonetheless, Morrison's dividend has been progressing nicely. From 4 pence per share in 2008, the 2012 figure hit 10.7 pence. For the next year, the dividend is expected rise 10% to 11.8 pence.
That is the cheapest the shares have been in five years. It seems a fair price, given growth expectations of just 3.9% profit this year.
Shire is currently priced at 13.6 times 2012 profit estimates and has an expected yield of 0.6%. Like Shell, this means Shire has not been as cheap since the credit crunch.
Better growth is expected from Shire than from Shell. Analysts forecast 28% EPS growth for 2012, followed by 8.2% growth in 2013. The dividend is expected to rise 31.3% this year and 20.6% the next.
Shire has delivered compound annual earnings growth of 30.1% in the last five years. By the same measure, the dividend has been rising 13.2% a year on average.
You might be surprised that Shire is available to buy at just 12.5 times consensus forecasts for 2013 profits. Typically, the market reserves a valuation like that for a company with only modest growth prospects. The problem is that pharmaceuticals like Shire are always under pressure from rival generic drugs. An announcement from the company earlier this year cast doubts over the long-term earnings from its attention deficit disorder drug Adderall XR.
At the current valuation, I would say the market is still making up its mind about Shire.
Ten years ago, Vodafone was a high-tech go-go share. Investors at that time were being asked to estimate Vodafone's long-term profit potential with little history to go on, which is always incredibly difficult. I'm glad I steered clear of the company at the time. Long-term holders will have been disappointed with Vodafone's share price progression in the last decade.
However, as the industry has matured, Vodafone has become a different kind of share. Although the share price may have disappointed, Vodafone's dividends have impressed.
From 1.47 pence in 2002, Vodafone has increased its dividend every year. For 2012, the payout hit 9.52 pence per share. This was further augmented by a 4 pence special dividend. The result is that Vodafone is now expected to overtake Shell as the FTSE 100's biggest dividend payer.
With recent interim results, the company confirmed a 7.2% increase in its interim dividend. While there will not be a special dividend this year, the company will be buying back its shares in the market.
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David owns shares in Vodafone. The Motley Fool owns shares in Tesco and has recommended shares in Vodafone. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.