British stock valuations look “unequivocally appealing”

Those with a long-time horizon – and the stomach for a bumpy ride – will find much to interest them in British stocks.

Get ready for dividend cuts, says Daniel Thomas in the Financial Times. British companies are usually a happy hunting ground for income-seekers, but with the Covid-19 pandemic decimating earnings and cash hoarding rife, investors are braced for “savage” cuts to payouts. 

This week saw ITV, Stagecoach and Kingfisher scrap dividends. FTSE 100 dividend payments have almost doubled to £90bn over the last decade. Yet even before the virus earnings cover for many FTSE 100 businesses looked stretched. 

A rallying dollar saw sterling slump to its lowest level since 1985 early this week before rallying. A weak currency is good news for the multinational giants of the FTSE 100, which make roughly 70% of their sales overseas. But the same cannot be said for the more domestically-focused FTSE 250, which has turned in a “stunningly bad” performance, notes John Authers on Bloomberg. It is down more than 35% for the year-to-date, underperforming even the Italian market. 

Markets are turbulent and risks abound, but valuations are “unequivocally more appealing than at any point in recent years”, says Duncan Lamont of Schroders. Those with a long-time horizon – and the stomach for a bumpy ride – will find much to interest them in British stocks. On a range of valuation metrics UK equities look more than 20% cheaper than their historical average.

The market plunge has opened up opportunities, agrees Tom Stevenson of Fidelity International for The Daily Telegraph. Even if more dividends are ultimately cut, 14 FTSE 100 companies were trading on double-digit dividend yields last week, which is remarkable. And 27 others were yielding more than 7%. “The best time to invest is not when you see light at the end of the tunnel but when the darkness is a shade less black.” This may be a great buying opportunity. 

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