UK blue-chip stocks are trading at dirt-cheap prices; is it an opportunity for long-term investors?

Fear and panic gripped the London Stock Exchange and global markets too, as the FTSE 100 yesterday slumped to 642 points or 10.93% to 5,234.0 and hit a new 52-week low of 5,216.50; also, this level was last witnessed in September 2011. This takes FTSE 100 to a 9-year low level.

COVID-19 pandemic has led to bloodbath across the global markets, including the UK market, which tanked over 11% yesterday.

Also, March 12, 2020 plunge of ~11% in the FTSE 100 index was the most significant one-day loss in the past three decades. Yesterday’s intraday fall in the UK benchmark index has substantially surpassed its prior highest intraday plunge of 8.85% on October 10, 2008

On March 11, 2020, the World Health Organisation (WHO) said that Coronavirus could be categorised as a pandemic. However, it has been monitoring the spread of this deadly COVID-19 round the clock.

Heavyweight, Integrated Oil & Gas companies including Royal Dutch Shell PLC and BP PLC were down approximately 15.5% and 12.5% yesterday, which dragged the broader index in the same proportion. However, after days of sharp decline on the NMC Health PLC counter, the scrip managed to trade flat against its prior closing level. Apart from NMC Health PLC, all FTSE 100 constituents ended in the negative territory.

UK blue-chip stocks staging a positive YoY price % return amid market bloodbath

At yesterday’s closing level, there were 18 out of 100 broader index constituents which were staging a positive price percentage return on a YoY basis. Some of these include names like Polymetal International PLC- a UK-headquartered gold mining company with a market capitalisation of £5.6bn, offering a YoY price % return of 36.2% amid accentuated turmoil in the broader markets, however; a free fall in the market has dragged the stocks approximately 0.3% down on a month-to-date (MTD) basis and 8.3% on a YTD basis; still the downside was far away from the broader index plunge in the same time. Next is London Stock Exchange Group PLC- London's most prominent investment and brokerage services provider in terms of the market-capitalisation (£22.2 bn), has also sustained firmly amidst prevailing propensity to sell in the broader market. Its shares are up ~ 36% on a year-over period to March 12, 2020. However, on a YTD, MTD and WTD basis, its shares have given up more than 15% but still maintained a positive price return on a YoY basis.  Rentokil Initial PLC- £7.8bn market-cap Environmental & Facilities Services provider, based out in Camberley, United Kingdom. Its shares are also offering a positive price return of 22% on a YoY basis to March 12, 2020. However, the broader trend has a weigh on the stocks on a YTD, MTD and WTD basis as its share price is down 7%, 13% and 16%, respectively.

UK Blue Chip businesses with high Earnings yield (%) Dividend yield (%), along with Cheap Valuation.

Amid COVID-19-led market crash, there are many quality businesses with proven management quality, higher Earnings Yield and Dividend Yield that are trading at dirt-cheap prices and valuations at the London Stock Exchange.

Several names include like, Carnival PLC- United Kingdom-based Hotels, Resorts & Cruise Lines business with an outstanding market capitalisation of £2.35bn, its shares have significantly tanked amid steep sell-off in the market. Also, the universe it belongs to is in profound stress as Coronavirus spread in over 125 countries have distorted leisure businesses across the globe. Carnival Plc is no more an exception. Its shares have tumbled approximately 70% on a YTD basis and handed a YoY price % return of negative 69% as well. On a month over the period, its shares have tanked above 45% and nudged down by ~ 35% on a week-to-date (WTD) basis to March 12, 2020. However, Carnival Plc has a lucrative and scalable business model, and once the slump gets over, it could further exploit and gain market share.  Also, at the last traded price, its stock was offering a massive earnings yield of 27%, which provides a higher margin of safety for investors and also its earnings yield is approximately 8000% above 10-year UK Government Bond Yield of 0.331%. Also, at the last traded price, its shares have offered a lucrative dividend yield 12.3%, approximately double of the FTSE 100 average dividend yield of around 6%.

Barclays Bank PLC- UK’s 3^rd-largest diversified banking group with a market-capitalisation of £16.8bn after HSBC Holdings Plc and Lloyds Banking Group Plc. Its shares price has shrugged off about 46% of its value on a YTD basis, tanked nearly 35% on an MTD basis and down 25.5% on a WTD basis. As global economic activities have been muted mainly because of the spread of the Coronavirus across the globe, which would increase chances of credit default or default on repayment of interest and principal for many businesses. However, this risk is for every banking business and is not only restricted to Barclays Bank Plc. Meanwhile, crude prices have slumped substantially to its multiyear low and hovering near $35/bbl from about $60/bbl a week ago. If this price trend in oil continues for an extended period of time together with recovery from the ill-effects of Coronavirus, it would significantly boost economic activities across the world and in the UK too. Also, interest rates across the economically developed nations are at a record low, which will enable higher credit offtake in future. Therefore, a significantly lower crude price which will lower costs for oil-intensive businesses and record low-interest rates across the globe could bring spurt in loan book of banking businesses in future. However, net interest Margin could be under pressure, but a higher credit offtake could bridge the gap. Also, at the last traded price, shares of BARC were offering a dividend yield of 9.9%, significantly above the benchmark FTSE 100 dividend yield of about 6% and its LTM earnings yield stood at 24%, which is significantly high.

Easyjet PLC: The group is the 2^nd largest British airline company in terms of the market capitalisation (£3.17bn), after International Consolidated Airlines Group SA. Since foreign travel has been largely restricted by many countries because of Coronavirus pandemic and travellers are cutting down on their overseas and domestic trips as a precaution against the novel Coronavirus, this has significantly impacted businesses of the airline companies as they aren't getting enough passengers to fly their aircraft even at break-even. This has dragged global airline companies' stocks, and Easyjet PLC is no exception. This reflects a sectoral pain and has nothing to do with the company’s fundamentals. Also, setting targets on industries which are going through tough phases have always benefited investors in long-run and generated huge returns with more than adequate risk premiums as well.

However, there is also some good news for the global airline industry. First, crude is significantly lower, which would lower their aviation turbine fuel costs, which is a high cost in proportion to the total revenue for the airline companies. Second, a lower interest rate regime will reduce their debt servicing costs, and they could refinance their debt at a lower rate of interest. Both lower prices of energy and lower financing costs are crucial for airline businesses in the long run.

Also, at the last traded price, shares of EZJ were offering an earnings yield of 11%, significantly higher against the fixed income security interest rates and also provides a higher margin of safety. Its dividend yield at the last closing stood at 5.8%, in line with the benchmark index’s average dividend yield.

However, the stocks mentioned above are not a recommendation in any sense and require additional research work before an investor takes up any position.Â

*Note: Earnings yield (%) and Dividend yield (%) have been compiled from data obtained from Thomson Reuters.