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Over the past 35 years, I’ve gradually realised that investing is as much an art as it is a science. Also, I’ve learnt that luck plays at least as big a part as skill when deciding when and where to invest. Even so, when I look at the UK’s FTSE 100 index today, I can’t help but see deep value hiding away in cheap UK shares.
Since the end of 2021, the FTSE 100 has lost less than 4.6% of its value. Adding in at least 3% for cash dividends already paid out in 2022 takes the index’s return closer to zero. That may not sound very attractive, but it’s a completely different story across the Atlantic.
In the US, the S&P 500 index has slumped by 18.2% this calendar year. Meanwhile, the tech-heavy Nasdaq Composite index has crashed by over 29% in 2022. And while other major stock markets have followed US shares down, the London market has been a relatively calm port in this global storm.
Barclays shares take a beating
Earlier this year, my wife and I both bought shares in big UK bank Barclays (LSE: BARC). To us, stock in the ‘Blue Eagle’ bank looked undervalued then — and may be even cheaper right now.
At its 52-week high, Barclays stock peaked at 219.6p on 14 January. Alas, global stock markets imploded after Russia invaded Ukraine on 24 February. At its 2022 low, this FTSE 100 share crashed to just 132.06p on 12 October. On Friday, it closed at 146.44p, down more than a quarter (-26.5%) over the past 12 months. The stock has also shed almost a fifth (-19.9%) of its value over five years. Ouch.
A dirt-cheap share?
Currently, Barclays has a market value of £23.8bn — a mere fraction of its pre-2008 highs. In my view, this price collapse has pushed this Footsie share deep into the bargain bin. Today, this popular stock trades on a lowly price-to-earnings ratio of 4.9, for an earnings yield of 20.4%. That’s one of the highest earnings yields on the entire London market.
In addition, Barclays shares offer an enticing dividend yield of 4.3% a year, a little above the FTSE 100’s. Impressively, this cash yield is covered a hefty 4.8 times by earnings, which suggests that it’s rock-solid and also has plenty of room for growth.
Bad times ahead?
But dark clouds have gathered on the horizon for Barclays and other big-cap firms. A toxic combination of soaring inflation, sky-high energy and fuel bills, rising interest rates and collapsing consumer confidence indicate a UK recession may be inevitable. But Barclays’ balance sheet is stronger than it’s ever been, with billions of pounds of spare capital to absorb future bad debts and loan losses.
In summary, 2022-23 is set to be a tough time for UK businesses, both big and small. Yet to me, this stock offers outstanding value to a patient, long-term investor like me. And if Barclays stock slides again, I may even buy more shares!