The UK market looks good value right now. It means there should be plenty of opportunities to find cheap UK shares for my portfolio. Here are two companies in the FTSE 100 I’d buy today.
A banking giant
The first company is Lloyds (LSE: LLOY). The share price has been on quite a rollercoaster since the financial crisis in 2008. But today, I think the shares look good value for its prospects ahead.
Starting with the valuation, and on a price-to-earnings ratio (P/E), Lloyds is rated on a multiple of 8. This looks very cheap to me. However, it’s important to form a forward-looking view of a company before I buy the shares.
Inflation is a key risk for markets and consumers in 2022. But for Lloyds, it might present an opportunity. When inflation rises, the Bank of England should raise interest rates in an attempt to control further price rises. Generally, rising interest rates favour banks, such as Lloyds, because they increase the rate of interest it can charge on its loans. This is measured by the net interest margin, and analysts are expecting it to rise in 2022. In support of this, Lloyds is expected to grow its dividend in the next two years. The forward yield should rise to 4.7% this year, and increase again in 2023 to 5.2%.
Lloyds is not without risk. For example, any economic slowdown could really hamper its lending business. On the other hand, rising interest rates may also reduce demand for mortgages, and therefore lower profitability for the company.
All things considered, I think the valuation is compelling for the risks ahead. The income potential is also attractive for my portfolio, so I’d buy Lloyds shares today.
Another cheap UK share
The next company I’d consider buying is ITV (LSE: ITV). It was greatly impacted by the pandemic as advertising budgets were cut. The share price fell from about 135p in February 2020, to a low of 50p. Since then, the shares have recovered to 113p as I write today.
The valuation still looks cheap, though. On a forward P/E the shares are trading on a multiple of 7, so there might be good value here.
Looking ahead and the dividend is expected to grow by 63% in 2022, and by almost 10% in 2023. The result would be a dividend yield of 5.3% for this year, which I consider good income for my portfolio. I have to keep in mind the risks here though. The dividend was stopped in 2020 due to the troubles caused by the pandemic. There’s always a chance that the dividend could be cut again if the company’s profits fall.
Having said this, I think ITV is in a better position today than in 2020. Net borrowing is forecast to reduce in 2021, and profit before tax is expected to rebound by a huge 122%. The company is highly cash generative too, which should support the dividend forecast. Not only this, but ITV is undergoing a digital transformation at present, and growing its video-on-demand offering. The company said it had been an “outstanding nine months” in its most recent trading update. This does sound promising, but I should monitor the progress here, as a potential shareholder.
I already own ITV shares, but I’d buy the stock again today as I view it as a cheap UK share with attractive income prospects.
Dan Appleby owns shares of ITV. The Motley Fool UK has recommended ITV and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
