June 19, 2021

Cheap UK shares: I’d follow Warren Buffett’s strategy to get rich

Warren Buffett is well known for his love of “buying quality merchandise when it is marked down.” I think he’d be interested in both of the cheap UK shares I’m going to look at today.

Both companies operate in the insurance sector, which is where Buffett made his fortune. Insurers are out of favour in the UK at the moment, but recent news suggests to me that investors can look forward to improving performance and some high dividend yields.

Covid claims cut

My first pick is commercial and general insurance group Hiscox (LSE: HSX). The firm is one of eight UK insurers which took part in a legal test case to clarify whether it should pay out on business interruption claims relating to the coronavirus lockdown.

The High Court has now released its judgement on this case — apparently it’s “more than 160 pages”.

What we need to know is that Hiscox’s share price rose by 17% after the firm confirmed it now expects to payout on “fewer than one third” of its 34,000 UK business interruption policies. The company now expects to payout less than £100m on these claims. Previous estimates suggested a worst-case payout of £250m, so this is much better than feared.

Hiscox shares could be cheap

Hiscox shares are down by around 40% this year, even after Tuesday’s gains. Uncertainty over Covid-related claims has been weighing on the share price, but now that we have some clarity on this I think the outlook could improve.

Indeed, I think this UK share could be cheap at current levels. Broker forecasts for 2021 suggest Hiscox could generate a earnings of $0.74 per share next year, with a dividend of $0.42.

That prices the stock on about 15 times forecast earnings, with a dividend yield of 3.8%.

For a company with a pretty successful track record, this looks very affordable to me. I’d also note that Hiscox shares are only trading at around 1.5 times book value — again, this is much lower than in recent years. I see Hiscox as a possible recovery buy.

Cheap UK shares: this 6% yield looks safe to me

Another winner from this week’s High Court judgement was FTSE 100 firm RSA Insurance Group (LSE: RSA). The RSA share price closed up by nearly 5% following that court judgement, continuing a recovery that’s seen the stock climb 50% from its March lows.

RSA now expects to face a bill for £142m relating to Covid business interruption claims in the UK, although it says the final figure could be lower. This looks easily affordable to me, given that RSA reported a surplus capital of £1.1bn at the end of June.

Shareholders should also be able to look forward to the return of RSA’s dividend. In its half-year results, the company said it expected to resume payments at the end of 2020. Management also said it’s planning to “catch up on missed dividend payments over time.”

City analysts expect RSA to declare a dividend of 27.2p for 2020, rising to 30p in 2021. These forecasts suggest a yield of 5.8% this year, rising to 6.4% next year. These forecasts look reasonable to me.

With the shares trading on just 12 times forecast earnings, I see RSA as a good, cheap, UK share to buy right now.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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