While the global economy continues to be in a turbulent phase, Britain’s flagship FTSE 100 index of leading shares has been doing well. This month, indeed, it hit a new all-time high.
So, would now be a good time for an investor to buy blue-chip UK shares?
Looking at individual trees, not the forest
The answer is potentially yes, no, and maybe!
An index of 100 shares contains shares that are doing well, ones that are doing badly, and some that are doing little of anything.
So, whether the FTSE 100 is at a high or low, individual shares within it may be overpriced or underpriced.
Hunting for bargains in today’s market
That explains why, in my opinion, the FTSE 100 still contains some bargains even after its recent strong performance.
So, how might an investor hunt for such a bargain?
My own approach is to stick to industries and companies I understand. I look for a business I think has a long-term sustainable competitive advantage in an area I expect to see ongoing strong customer demand.
As well as looking at that, I weigh up the balance sheet. I prefer not to invest in a firm that makes lots of profits but has to use them to service debt.
I also consider the valuation. A good business can be a bad investment if an investor overpays for its shares.
One UK share to consider
As an example of this approach in practice, one FTSE 100 share for investors to consider is Legal & General (LSE: LGEN).
The well-known financial services provider operates in a market that has high demand and I expect that will continue. Over recent years, it has become more specialised in retirement-linked financial services. I think that makes sense: it is a huge market with long-term demand.
Being seen more as a retirement expert than a generalist is a competitive advantage for the firm, in my opinion. Others include its strong, long-established brand and large customer base.
The business has been consistently profitable. The past several years have seen lower profits than in prior years, though.
Recently, it announced plans to sell a US business. In the short term that is good news. It could generate substantial cash that can be distributed to shareholders.
Longer term, however, it risks lower profits for Legal & General as well as tying its performance more closely than before to the UK economy.
I also see a risk that if the economy performs poorly, policy holders may take out more than they put in, hurting profits. Legal & General last cut its dividend during the 2008 financial crisis.
For now, though, the dividend continues to grow annually, and the current yield is 8.8%. No dividend is ever guaranteed to last, but that yield is well over double the FTSE 100 average.
This post was originally published on Motley Fool
