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The FTSE 100 is packed with brilliant value shares for investors to choose from. Some appear so cheap, in fact, that they could well be considered ‘no-brainer’ stocks to buy.
Yet value investing can also throw up traps for share pickers to navigate.
We all love a stock with low valuation metrics such as the price-to-earnings (P/E) ratio or price-to-book (P/B) ratio. But some companies are cheap for a reason and face problems like weak management, rising competition, industry decline, high debts, and regulatory issues.
Danger zone
Lloyds (LSE:LLOY) is one Footsie stock that’s regularly near top of the list of ‘most bought’ shares among retail investors. This is thanks in part to the excellent value it provides on paper.
In fact, it looks like one of those no-brainer buys I mention.
The bank’s P/E ratio is just 8 times, and it sports an 6.4% dividend yield. On top of this, its P/B ratio is 0.8. Any reading below 1 means a share’s trading at a discount to asset value.
However, I believe Lloyds’ low valuation reflects the high level of risk it poses to investors. Its brand strength makes it one of the high street’s most popular banks. But it also faces a dreadful combination of poor loan growth and painful credit impairments as the UK economy struggles.
Other dangers include rising competition from challenger banks, margin erosion as interest rates fall, and potentially eye-watering fines if found guilty of mis-selling car loans.
Many of these problems mean Lloyds’ share price has fallen by low-single-digit percentages since 2009. So although it’s provided solid dividend income in that time, its annual average return over that time horizon is a mediocre 2.2%.
This is far below the FTSE 100’s long-term average of 7%.
A better bargain?
Legal & General (LSE:LGEN) is another popular FTSE 100 share today. This is likely due to its cheapness following a sharp share price drop in 2024.
The financial services giant’s forward P/E ratio is just 10 times. Its dividend yield is 9.2%.
Finally, its price-to-earnings growth (PEG) reading sits below the value watermark of 1, at 0.4.
But unlike Lloyds, I think Legal & General is a great bargain to consider buying. That’s even though it’s earnings are also vulnerable to high levels of market competition.
It’s my view that the potential rewards of owning Legal & General shares outweigh the risks. It has an enormous chance to grow sales amid demographic changes and rising interest in financial planning.
The outlook in the bulk annuity market is particularly bright, though other lines like life insurance, pensions and asset management also have significant scope for growth.
Brilliant brand power and financial strength means Legal & General’s in good shape to realise this opportunity. A Solvency II ratio of 223% gives it plenty of clout to invest for growth.
Investing £500 today
A mix of healthy share price gains and large dividends means Legal & General shares have delivered an average annual return of 11.6%. That’s far above the long-term average of 7% for Footsie shares.
Past performance is no guarantee of future returns. But if Legal & General can continue that brilliant run, a £500 investment today — along with a further £500 investment for another 15 years — would eventually turn into £240,514.
