3 reasons UK shares are crazily cheap!

In the second half of 2021, I have repeatedly warned that financial assets have become a ‘bubble of everything’ that will burst. And so it was. But during that time, I also wrote that UK stocks – and especially FTSE 100 stock – looks incredibly cheap.

UK shows a comeback stage

When global stock markets crashed last year, the FTSE 100 was a safe harbor in this storm. Indeed, the index is actually up 0.9% in 2022. Adding, say, another 4% for cash dividends takes the Footsie’s annual return to nearly 5%. This made it the best performer among the major market indices last year.

For me, the reason for this global outperformance UK shares were just far too cheap. But even after the recent surge, the London-listed stock still looks cheap to me. Here are three reasons why.

1. FTSE 100 earnings are rated modestly

In global and geographic terms, the FTSE 100 seems to be on the wrong side. On a forward-looking basis, it trades below 12 times earnings. This gives the index an earnings yield of 8.3%.

Meanwhile, the U.S S&P 500 the index trades in forward ratings of nearly 18 times earnings. This means an annual income of 5.6%.

Thus, UK stocks appear to be cheaper than US stocks. But history shows that US stocks get higher ratings because of superior earnings growth. Despite this, the FTSE 100 still looks cheap to me.

2. UK shares offer attractive cash dividends

As a dividend investor, I like to sift through the FTSE 100 for income producing stocks. Helpfully, almost all Footsie companies pay cash dividends to their shareholders.

Currently, the UK blue-chip index offers a forward dividend yield of 4% per annum. To me, this is a good enough return to take the risk of investing in the company’s stock.

Meanwhile, on the other side of the Atlantic, the S&P 500 offers a cash yield of just 1.7% a year. However, US companies generally prefer to reinvest earnings back into the business, rather than pay out cash to their owners.

However, I like the balance and ballast that yields a dividend that outperforms the FTSE 100 market for a family portfolio. But as a value, dividend and income investors, I’m also a bit biased!

3. Cheap takeover targets

In 2022-23, UK companies are increasingly the target of cash-rich bidders. Indeed, no less than 49 companies listed in London were subject to takeover bids last year, according to one British investment platform.

just this week John Wood Group – a leading FTSE 250 oilfield-services company – admitted to turning down three cash offers from the US private-equity giant. The stock jumped 28% on Thursday, after the news broke.

With US private-equity Goliaths sitting on huge amounts of uninvested cash, I expect more takeover activity this year among FTSE 100 and FTSE 250 companies. Also, the weakness of the pound against the US dollar makes listed companies look very cheap to buyers. American.

In summary, with the FTSE 100 today trading at a 15% discount to global stocks, I’m still a fan of cheap UK stocks. And this in spite of growing concerns about sky-high inflation, rising interest rates and a possible recession that could be on the way!