Five FTSE 100 bargains investors should consider

Looking for value from your investments? These five shares stand out.

Since peaking at an all-time intraday high of 7,122 on 27th April, the FTSE 100 index has suffered a setback over the past two months.

Worries about a possible Grexit, higher US interest rates and global terrorism have sent the index sliding by almost 6.5%.

While that's disappointing for shareholders, investors may see now as a good time to add more money to the market. Likewise, as we are halfway through the year, investors should review and reshuffle their portfolios, as institutional investors do each quarter.

Identifying bargains

So let's go bargain-hunting in the FTSE 100 to find shares that look cheap at today's reduced prices. As a value investor, I aim to buy into good businesses at fair prices, so I have sifted through the index looking for shares with three simple characteristics:

1. A low price-earnings ratio (PER), ideally, below both the market average and its peers' PERs. This is calculated by comparing its current share price to its per-share earnings.
2. A dividend yield above the market average and higher than rivals' yields.
3. Positive dividend cover - this is the ratio of the net earnings over the dividend paid to shareholders. It should preferably be above 1.5 times earnings.

Using these three main value indicators, five bargain shares jump out, all in very different fields.

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An investment trust

The UK's largest investment trust, 3i today looks after £13.5 billion of investor assets, mostly in private equity, infrastructure and debt securities.

Currently, 3i is the cheapest share in the FTSE 100, thanks to an ultra-low PER of 7.2. It also pays a generous dividend of 3.74%, which is above the market average. Given its 70-year history of delivering superior returns to patient investors, 3i is a classic 'buy and hold' value share.

An oil producer

Shares in oil explorers and producers have plunged since the price of oil fell from $115 a barrel in June 2014 to around $62 today. Shares in smaller firms have been hit harder, largely because of the sheer size and scale of RDS and other 'super-majors'.

RDS's market value is down to £120 billion, due to its shares having fallen by 20% over the past 12 months. This fall has cut Shell's PER to below 10 and pumped up its dividend to be the FTSE 100's highest. Dividend cover has dropped to 1.6 times earnings, but this global giant has not cut its dividend since 1945 and has promised to maintain it this year.

For its juicy dividend, and on hopes of a future recovery in the oil price, RDS is the pick of the big oil barons.

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An insurer

With a PER of 10.5, Aviva is the cheapest of all seven FTSE 100 insurers. However, its dividend yield is the third-lowest of the seven, beaten by Legal & General (4.41%), Old Mutual (4.15%), Direct Line (3.86%) and Standard Life (3.58%). Then again, Aviva's dividend is covered a chunky 2.7 times, giving plenty of room for yearly uplifts (and following cuts in 2009 and 2013).

For its combination of a low PER and a decent dividend, Aviva gets the thumbs up from me.

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A bank

Thanks to its Lloyds Bank, Halifax, Bank of Scotland and Birmingham Midshires brands, Lloyds is one of the UK's biggest banks. During the banking crisis of 2008, Lloyds survived thanks to a £17 billion taxpayer bailout and has slowly recovered since.

What should attract investors to Lloyds is its PER of 10.7, the lowest in the sector. Despite paying billions in regulatory fines and customer compensation, Lloyds' earnings have been bouncing back, fuelled by strong recovery in lending and welcome reductions in bad debts.

Back in May Lloyds paid its first dividend (a mere 0.75p a share) since its interim dividend of October 2008. Although Lloyds' yield is below 1% right now, it could return to a normalised 5% over the next couple of years if the UK's economic recovery continues.

Accordingly, for its low PER and projected steep dividend increases, Lloyds is the pick of the banks.

Enjoy tax-free returns from your investments with a Stocks & Shares ISA

A drug-maker

Disclosure: I have owned shares in GSK almost continuously since the late Eighties.

GSK shares are not particularly cheap, currently trading on a PER above 14. However, their main attraction is a dividend yield approaching 6% which, sadly, is covered only 1.2 times. In the past decade, GSK has raised its dividend by around 6% a year, but management expects to hold the yearly payout at 80p for the next two years.

There are rumours that GSK could cut its dividend by up to 20%, but even if GSK's dividend were to be cut, it would still be generous among FTSE 100 stocks.

What do you think of my picks? Are there any other bargains out there that have caught your eye? Let us know your thoughts in the comments box below.

Enjoy tax-free returns from your investments with a Stocks & Shares ISA

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