LONDON -- The FTSE 100 has risen by 25% over the last year, and many top shares are beginning to look quite expensive.
I'm on the hunt for companies that still look cheap, based on their long-term earnings potential. To help me hunt down these bargains, I'm using a special version of the price to earnings ratio called the PE10, which is one of my favorite tools for value investing.
The PE10 compares the current share price with average earnings per share for the last ten years. This smoothes out any short-term volatility and lets you see whether a company looks cheap compared to its long-term earnings.
Today, I'm going to take a look at the PE10 for RSA Insurance Group
Is RSA Insurance Group a buy?
RSA's share price has dropped by nearly 20% since February, when the firm announced a 33% cut to its final dividend, and said that the interim dividend would also be cut by a similar percentage.
However, despite the cuts, RSA's prospective dividend yield of 5.3% is still one of the highest in the FTSE 100 -- so is it a buy?
RSA Insurance Group
RSA's PE10 shows that it is currently trading at 16.4 times its average earnings from the last ten years. To me, this suggests that RSA is quite fully priced at the moment, in the absence of major new growth initiatives, which aren't likely.
Based on its PE10, I think that RSA is a hold.
RSA's average dividend yield over the last five years was 6.7%, roughly double the FTSE 100 average. As a result, RSA's share price was 16% above its book value per share at the end of 2012, despite investors' concerns about the sustainability of the dividend.
February's dividend cut brought investors back down to earth, and RSA's current share price of 115 pence is broadly in line with its most recent book value per share of 112 pence, suggesting that further falls are unlikely unless the firm releases some bad news, or the eurozone crisis takes a turn for the worse.
I must admit that if I didn't already own shares in Aviva, then I would probably add RSA to my income portfolio. There are not many ways of accessing a 5.3% prospective yield in today's markets, and RSA's income potential is definitely a big attraction.
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The article This P/E Suggests RSA Insurance Is a Hold originally appeared on Fool.com.
Roland owns shares in Aviva but does not own shares in RSA Insurance Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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