This has been a great year for the London Stock Exchange in some ways, with the FTSE 100 hitting an all-time high. However, there’s a sense of gloom in the City. The UK is struggling to keep or attract companies that think they can get better valuations in other markets.
This situation is showing up in stock valuations and, in some cases, dividend yields. But I believe this creates a fantastic opportunity for savvy investors who take a long-term approach to building wealth, thanks to the relatively low prices of some FTSE 100 shares.
Building Wealth in the Stock Market for the Long Run
When it comes to growing wealth through owning shares, there are two main drivers:
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Price Growth: This is when a share’s price goes up, and an investor can sell it for more than they paid. The price difference only matters when the share is sold, so until then, any gains or losses are just on paper.
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Dividends: This is the income an investor gets from holding shares in the form of cash payouts. Dividends can provide a steady stream of income, even if share prices aren’t increasing.
Why Low Share Prices Can Be Good News
A falling share price might seem bad at first glance. After all, it’s just an indication of what someone is willing to pay for the stock.
But here’s the thing: if an investor doesn’t plan on selling the share, a drop in price could actually be a good thing. It allows them to buy more shares with the same amount of money.
Also, dividend yields are calculated based on the dividend per share and the share price. For example, if a share costs £1 and the dividend is 5p, the yield is 5%. But if that share’s price drops by half while the dividend stays the same (which is never guaranteed), the yield goes up to 10%. So a falling share price could mean more value for dividend-seeking investors.
Searching for Bargains in the FTSE 100
Now let’s talk about the FTSE 100.
One share I own and have bought more of recently is JD Sports (LSE: JD). Even with its current price, the dividend yield of 1% doesn’t excite me — there are many other FTSE 100 companies with higher yields.
What does excite me is the stock’s low valuation. I believe it’s much lower than what JD Sports could be worth in the future.
The retailer’s share price has dropped by 41% this year, and it now trades at a very low price. I think this drop reflects risks like weaker consumer spending affecting sales and profit margins. The company has issued several profit warnings this year, which have caused the stock to fall.
However, JD Sports has a strong brand, a large international store network, and a solid customer base. Sales are still growing, and the company is investing heavily in expanding its store network. While it could have chosen to keep that money as profit, it’s choosing to grow its future profitability instead.
What About the Price-to-Earnings Ratio?
At a market value of under £5 billion, JD Sports seems like a bargain to me, especially for a FTSE 100 company that still expects its full-year profit (before tax and adjustments) to be at least £955 million, even after the recent profit warning.
In short, while JD Sports is currently going through some challenges, its strong brand and growth potential make it an attractive investment for the long term.
