The FTSE 100 is full of cheap shares at present. Two companies, in particular, stand out to me as being deeply undervalued despite their strong balance sheets and rising profits.
FTSE 100 stocks
The first organisation on my list is insurance giant Aviva (LSE: AV). There’s a lot to like about this business, in my opinion. It’s one of the largest pension and savings companies in the UK, and it is one of the most trusted financial brands in the country, according to my research.
Unfortunately, over the past few years, the company seems to have made several missteps that have depressed investor sentiment. It was also without a CEO for a few months.
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These issues now seem to be behind the enterprise. A new management team is working to reduce costs and improve efficiency. There are also disposals in the works to remove non-core businesses.
I think these efforts should help streamline the business as we advance. That should lead to enhanced profit margins and bigger returns for investors.
Even if one were to ignore this potential, Aviva looks to me to be dirt-cheap at current levels. Indeed, the shares are trading below the company’s book value, which suggests they offer a wide margin of safety.
On top of this, the stock currently supports a dividend yield of 9.4%. That is more than double the market average. As cheap shares go, I think Aviva is one of the most attractive on the market right now.
Buying cheap shares
The other company I have my eye on is Phoenix Group (LSE: PHNX). This firm operates a relatively complex business model. It buys books of life and pension policies from other businesses and takes on their management. By combining the management of all of these products under one roof, Phoenix can achieve economies of scale that are not available to other firms.
This is a win-win for both parties. The seller can offload policies it doesn’t necessarily want to manage and unlock capital. Meanwhile, Phoenix earns money by pushing down costs and pocketing excess fee margins.
If the company’s historical cash returns are anything to go by, this business is exceptionally lucrative. The dividend yield on Phoenix’s shares has averaged 6.5% for the past five years.
As pension and life insurance policies can run for decades, I’m optimistic that Phoenix can maintain this level of income distribution in the long term. That’s why I’d buy this FTSE 100 stock for a portfolio of cheap shares. In the current interest rate environment, a dividend yield of 6.5% looks extremely attractive to me.
What’s more, the stock may produce capital returns as the business continues to acquire new business. Thanks to previous acquisitions, net income has roughly doubled over the past six years. Considering the size of the pension and life insurance market in the UK, I reckon this can continue.
