FTSE 100 and FTSE 250 mid-year valuations

We’re about halfway through 2019, so now is a good time to stop, smell the roses and see how attractively valued (or not) the FTSE 100 and FTSE 250 are.

I’ll be estimating fair value for these indices using their dividend yields and CAPE ratios (Cyclically Adjusted PE), because I think the standard PE ratio is basically useless as a valuation too.

Why I don’t use the PE ratio to value indices

If you’ve heard my anti-PE rant before then feel free to skip down to the next section. If not, here’s a quick summary of why the PE ratio is almost useless for long-term investors:

The reason is that the PE ratio compares an index or a company’s price to last year’s earnings, and earnings over a single year are just too volatile to be a useful measure of long-term value.

For example, in mid-2017 the FTSE 100’s price was 7,400 and its PE ratio was 25. That’s quite a high PE ratio, so a PE-focused investor might have thought the FTSE 100 was expensive at the time.

However, one year later in mid-2018 the FTSE 100’s price had risen very slightly to 7,700 but its PE ratio had almost halved to 13.4. So now a PE-focused investor might think the FTSE 100 was fairly valued or even cheap.

But how can that make sense? The FTSE 100 stayed roughly flat for a year and the PE ratio halved, so if we’re using the PE ratio as a measure of price to intrinsic, fair or long-term value then we’re saying that the fair value of the FTSE 100 doubled in just one year. Really?

Of course it doesn’t make sense to say that the FTSE 100’s intrinsic or fair value doubled in a single year.

What doubled was its earnings over one single solitary year, from 296 index points in mid-2017 to 575 in mid-2018. What didn’t double in a year was the ability of 100 very large companies to generate long-term profits, and that’s why the PE ratio is basically useless.

So rather than looking at the PE ratio, long-term investors need to value companies and market indices using something which is more stable and reliable, and my two preferred candidates are the dividend yield and the CAPE ratio.

Valuing the FTSE 100 using dividend yield

The dividend yield is a more useful measure than the PE ratio because dividends tend to be more stable than earnings from one year to the next, as the chart below shows:

FTSE 100 dividend and earnings to 2019
As with individual companies, index dividends tend to be quite stable

This stability gives us something solid and consistent to compare volatile prices to, so let’s do that using the trusty old dividend yield:

  • The FTSE 100’s price is 7,400 and its dividend yield is 4.4%

That’s comfortably above the index’s average dividend yield for the last 30 years, which is 3.3%:

FTSE 100 dividend yield to 2019
The FTSE 100’s yield is still above the 3.3% average

An above average dividend yield is a reasonably good indicator that prices are below average and that expected future returns are above average. So today’s above average yield is good news for long-term investors.

Unfortunately though, most investors don’t see high yields as good news. They focus on the falling prices which create higher yields, and those falling prices scare them off.

A good example of this was the 2018 year-end ‘correction’. It left the FTSE 100 with a low price of 6,700 and a high dividend yield of 4.7%, but panicked investors were jumping ship left, right and centre.

If they’d focused instead on the FTSE 100’s increasing yield rather than its falling price, they would (or should) have realised that the index was in fact more attractively valued at the end of 2018 – according to its dividend yield – than at almost any time over the previous 30 years.

Returning to the FTSE 100’s current dividend yield of 4.4%, if we assume fair value is the price that gives the FTSE 100 its long-term average dividend yield (of 3.3%), then we get the following result:

  • The FTSE 100’s yield-based estimate of fair value is 9,900

At 7,400 the FTSE 100 is about 25% below estimated fair value. Another way to think about this is that it would need to grow by 34% before reaching estimated fair value, which is quite a lot. In fact, as the chart above shows, the FTSE 100’s dividend yield is still close to its 30-year high, so the yield-based valuation is near its 30-year low.

The only time yields were much higher than this was during the depths of the financial crisis in March 2009, although that short-lived episode doesn’t show up on the chart because it only uses year-end data.

In summary then, dividend yield-based valuation are looking quite attractive. Next up is an estimate of fair value using Robert Shiller’s CAPE ratio.

Valuing the FTSE 100 using the CAPE ratio

The CAPE ratio (Cyclically Adjusted PE) is another useful measure of value because it smooths out the ‘E’ part of the ratio by using an inflation adjusted ten-year average of earnings rather than just a single year’s.

The chart below shows how dividends and CAPE earnings have both been relatively steady over the long-term, although a recent decline in CAPE earnings (caused by the 2009 financial crisis and the 2014 commodity price collapse) shows that no financial metric will be perfectly smooth and steady in what is a volatile, uncertain, complex and ambiguous world.

FTSE 100 dividend and CAPE earnings to 2019
Dividends and CAPE earnings grow steadily (most of the time)

Since CAPE earnings are generally quite steady from year to year, changes in the CAPE ratio are usually driven by changes in price.

And as with dividend yield, when the ratio is equal to its long-term average we can assume (incorrectly but reasonably) that the index is at fair value, when it’s above average the index is above fair value and when it’s below average the index is below fair value.

Here’s a quick chart showing CAPE’s volatility over a typical investment lifetime:

The attractiveness of an index and its CAPE ratio have an inverse relationship

The FTSE 100’s CAPE ratio has ranged from just over 30 at the peak of the dot-com boom down to about 10 at the bottom of the financial crisis in March 2009 (this doesn’t fully show up on the chart as it uses year-end data only).

The average CAPE for the period is 18.7, but I think that’s above the ‘true’ long-term average thanks to the wild excesses of the dot-com bubble and its wildly elevated CAPE ratio.

I generally assume the true long-term average is closer to 16, as that’s more in line with the long-term average CAPE of international markets. 16 also somewhat neatly sits in the middle of a range (actually a logarithmic scale) from 8 and 32, and that range pretty much encapsulates the range of CAPE value we’ve experienced over the last 30 years.

With the FTSE 100 at 7,400 and its cyclically adjusted earnings at 463 (index points), we get the following result:

  • At a price of 7,400 the FTSE 100’s CAPE ratio is 16.0

Oddly enough, this is bang on my estimated long-term average for CAPE, which means:

  • According to the CAPE ratio, the FTSE 100 is fairly valued at 7,400

Before I wrap up this FTSE 100 valuation, here’s a chart showing how the index price has moved around within its normal valuation range:

Valuations are currently neither exceptionally high or low

One thing you may have spotted is that the CAPE-based estimate of fair value is quite different to the yield-based estimate, so it’s probably time to say something about why that doesn’t really matter.

Fair value is only an estimate and that’s okay

The two estimates of fair value I’ve come up with so far are quite different, but that’s only half the story. In my 2018 year-end review, I said the FTSE 100’s dividend yield-based fair value was just over 10,100, and that’s north of the both the fair value estimates from this article.

So what’s going on? Was I wrong last time, am I wrong this time and can fair value really be this hard to pin down?

The answer is yes in all three cases, and this highlights two important facts:

1) Fair value can only ever be an estimate

Nobody knows what’s going to happen tomorrow, so nobody knows the true fair value of the FTSE 100. That’s because fair value is (in technical terms) the present value of all the FTSE 100’s future earnings, discounted at an appropriate rate.

We don’t know what those future earnings will be, so we don’t know what fair value is. But we can make sensible estimates.

2) Fair value is only really useful when an index is a long way from it

The relationship between index prices and fair value is the same as the relationship between a dog on a long elasticated lead and the dog’s owner. They are connected, but only loosely. The dog (prices) can travel a long way from its owner (fair value) and the only time there’s a strong pull back towards the owner is when the dog’s far away and the elasticated lead (investor sentiment) is stretched to breaking point.

This means the inevitable inaccuracy of our fair value estimate doesn’t matter when the market is close to fair value, because such a small difference is unlikely to affect the market’s future direction anyway.

And when an index’s price is a long way from fair value the gap between price and fair value will be so large that a ten or twenty percent error in our fair value estimate also won’t matter because the valuation gap will still be blindingly obvious.

The FTSE 100: Close to but likely below fair value

In summary then, the FTSE 100 is approximately zero to 25% below a reasonable estimate of fair value.

This isn’t a great surprise given the amount of negative sentiment surrounding the UK at the moment, largely thanks to ongoing Brexit uncertainties.

Given this starting point, I think the FTSE 100 is likely to produce annualised total returns at least in line with its historic norm of seven to nine percent over the next decade, and quite possibly even more if the index moves beyond the 9,900 estimate of fair value.

Okay, that’s enough crystal ball gazing. Now it’s time to estimate fair value for the FTSE 250 in a hopefully somewhat more brisk fashion.

Valuing the FTSE 250’s using dividend yield

The FTSE 250’s price is currently 19,290 and it’s dividend yield is 3.2%.

Over the last 27 years (that’s the period I have data for) the FTSE 250’s average yield has been 3.0%.

This gives the following result, if we again assume fair value is when the index’s yield is equal to its long-term average:

  • The FTSE 250’s yield-based estimate of fair value is 20,900

The FTSE 250 is currently just 8% below this fair value estimate, which is nothing.

Valuing the FTSE 250’s using the CAPE ratio

The FTSE 250’s inflation adjusted ten-year average (CAPE) earnings are currently 823 index points.

With its price at 19,290 that gives the FTSE 250 a CAPE ratio of 23.4.

This seems high compared to the FTSE 100, but the FTSE 250 usually does have a higher CAPE ratio. That’s probably because FTSE 250 companies are smaller and often faster-growing than their large-cap cousins.

The average FTSE 250 CAPE ratio since 1993 is 23, but I usually round this down to 20 because a) it’s an easier number to work with and b) 23 is probably a little bit above the true long-term average because of high valuations during the dot-com and credit bubbles of the 1990s and 2000s.

If we assume that fair value occurs when the FTSE 250 has a CAPE ratio of 20, we get the following result:

  • The FTSE250’s CAPE-based estimate of fair value is 16,500

As with the FTSE 100, we have a difference between the two estimates of fair value and that’s okay.

With one estimate of 20,900 and one of 16,500, we can see a reasonable range of possible values for fair value, and at 19,290 the FTSE 250 currently sits inside that reasonable range.

This means it’s reasonable to expect the FTSE 250 to produce historically average returns over the next decade because a) the dividend yield is close to average and b) price growth won’t be held back by an excessively high starting point or boosted by an excessively low starting point.

And in case you were wondering, average returns for the FTSE 250 means an annualised total return of something in the region of 10%, with much variation year-to-year.

To finish off, here’s the CAPE valuation rainbow chart for the FTSE 250, showing the index’s historical and current valuation gap:

More middling valuations for the FTSE 250

Boring but useful

I will admit that sometimes it can seem a bit pointless to do these infrequent but regular market valuations, especially when valuations have been largely benign and close to fair value for several years.

On that final point I would say a couple of things:

1) If you’re a ship’s lookout, you don’t stop looking for icebergs just because you haven’t seen one in a couple of days, and

2) Regularly reminding ourselves about the basics of long-term fair value should help us to buy low when everyone else is panicking and to sell high when everyone else sees nothing but rainbows and unicorns.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

18 thoughts on “FTSE 100 and FTSE 250 mid-year valuations”

  1. Hi John,
    Great article as ever.

    I agree with your analysis and conclusions.

    Just one bugbear; the trailing yeild on the FTSE-100 is currently c.4.3%, not 3.9% as you state. I track this very closely and have done for years (public sources which confirm this include the Link Assets Quarterly Dividend Monitor, for example).

    Where have you got 3.9% from and do you agree it is an error?

    Many thanks

    1. Hi Jon,

      Damn, you’re right! I get my yield data from the FT:


      But, I had some old versions of that doc open because I was looking at the FTSE 100’s PE and how that had bounced around between 2017 and 2018. Then I must have looked back at the mid-2017 report, when the FTSE 100 was around 7,400, as it is today, and took the yield of 3.9% from there. So it’s human error, as usual!

      I’ll re-calculate the yield-based fair value and update the article with the correct figures, so thank’s for picking up on that one.


  2. John,

    Unless you are a pure index investor, I’d guess a better measurement might be if you strip out the oil and commodity players and see what the underlying yield and valuation is then.

    Regards LR

  3. Thank you John.
    Do you have any views on CAPE across the pond?
    Bit outside your remit !!
    But a collapsing US market if it does ever happen should impact on UK.
    Thanks again.

    1. Hi Bob

      You can see a nice chart of the S&P 500’s CAPE ratio here:


      With the S&P 500 at 2,940 CAPE is 30, which is higher than it’s ever been, other than 1929 (just prior to the Great Depression), 1999 (just prior to the dot-com implosion) and a couple of recent peaks in 2018 and 2019.

      As and when we get our next recession the US market could tank, and that might affect the UK market. If the UK market falls off a cliff then it could be an excellent buying opportunity given the already quite reasonable UK valuations.

      Having said that, I don’t like market timing so I won’t be trying to time the top (to get out) or the bottom (to get in). I’m just going to stick to my plan of continuously searching for above average companies at below average valuations, and the market can do what it likes.

  4. Just found your website. Ordering the book for some holiday reading.

    You should get a youtube channel or a podcast 👍

    1. Hi John, you’re right, I probably should. Most likely would be a YouTube channel so that I can do a verbal/visual version of the book, broken into a series of videos. Plus possibly doing verbal/visual reviews of companies. It all takes time though, so don’t hold your breath!

  5. Hi John, Have you revised your view on National Grid in the light of the recent government guidelines to allow a lower return for utilities, and the submission yesterday of what National Grid wants?

    I see that the share price came close to your target at 7XX and has subsequently recovered somewhat at 874.5 live on my screen as I type.

    A Corbyn government might do untold things to NG, even if not fully nationalising it due to the US business complexity – but we are a long way away from a Corbyn Government just yet.
    The returns look like they could now be lower than the 8% calculated in your model, and the debt load could loom larger than the 13X profits which will or could well be compromised.

    Regards LR

    1. I was interested in NG aswell.

      I do follow politics a bit and I honestly do not think Corbyn has any chance of getting in and hes been leader for along time so Labour will probably chop him soon.

      Another company I wanted a piece of was UK power networks but it doesnt look like its possible since its owned by chinese firms.

      1. Never say never in investments.

        I would not invest in utilities for two reasons:

        there are a lot better companies out there!
        Because they are regulated, these stocks although have a low price per book value, do not show a ‘value premia’. There is a good study done by Fama & French on utilities.

    2. Hi LR, my thoughts on NG are much the same as they were in 2017, although to be honest I haven’t thought about the company much since then.

      If it got down to 750p then perhaps I might take a closer look, but I suspect (very strongly) that I wouldn’t be interested. The investment case rests on NG being a regulated monopoly, and I’m not very keen on highly regulated companies having been bitten more than once when regulators repeatedly change the rules!

      If it wasn’t for NG’s position as a regulated monopoly, I would describe it as a low growth company (about 2% per year) with sub-par profitability (9% returns on capital), large capex requirements (almost 200% of profits) and lots of debt (about 15-times profits!). But it is a regulated monopoly and I don’t trust regulators not to pull the rug out from under NG’s feet!

      On utilities more generally, I’m actually moving out of the sector, bit by bit. These companies used to fit my old investment model (Defensive Value Investing 1.0), but as I’ve added tighter rules on debt, profitability, capital intensity and so on, they just don’t fit my criteria very well. So I sold Capita recently, and my remaining utility holdings are not far behind.

      1. John – not a whole lot of change in view then as I guessed. Offloading utilities sounds like a plan – the unpredictability is crazy and is testament to the fickle nature of politics that can turn industries inside out – regulated one’s potentially more so. I’m completely out of utilities apart from having bought NG at 780, took some dividends and offloaded the other day.

        Also let go of Domino Pizza, one that you occassionally cover. I fear the UK saturation is already hitting the like for like growth earlier than expected and so far they have made a complete hash of the international businesses which fortunately is still quite small but represents an annoying cash drain nonetheless. It’s possibly got upside, but I don’t believe it has anymore than the general index which is on a higher yield.
        Also Domino doesn’t have the field to iteself anymore – it’s online app and fast own delivery service were once unique – not anymore, you now have uber-eats, Deliveroo, JustEat and uncle Tom Cobbly and all so to speak.

        Regards LR

      2. On Domino’s, I don’t expect to sell anytime soon, but the market for delivered food is definitely getting super-competitive. It’s hurting physical restaurants and incumbents like Domino’s, but I’ll hold judgement for now and assume Domino’s economies of scale and brand are enough to sustain it for the foreseeable future. As for the international business, it offers huge upside if they can get it right. But that’s a big if.

  6. Thank you for a great article, John! I’d be interested where you got your CAPE figures from. I’ve been trying to calculate them myself but I’m finding it very hard to get hold of the relevant data – earnings by company, composition of the FTSE indexes by year etc.

    Many thanks!

    1. Hi Bruce, unfortunately there isn’t a transparent source of CAPE data or the UK.

      In my case it comes from a few different sources which I’ve had to extract and nail together.

      For example, I have collected recent data from the FT over the years. They change the web address every now and then and the current latest data is here:


      Older data I’ve scraped from books, web forums and even charts on various websites.

      It’s not ideal, but sadly we don’t have a Robert Shiller in this country with a robust long-term data set.

      1. Thanks for the great, quick reply! And thank you for the effort you’ve gone to to put this together and for sharing what you’ve found. Having walked a little way down that road, I am seeing how much is involved. I agree that the US data seems a lot more accessible. For example, unless I’m mistaken, whereas in the US, edgar makes all company annual reports available in electronic format back to 2000 or so, in the UK, the government makes annual reports available in … scanned pdfs (except for the last year or so). Unbelievable in 2019!

        I am starting to build a useful data set, but am very grateful to the shortcut to useful information you’ve provided here. Thanks again.

  7. Hi John

    I am so pleased to have found you. I have in affect created my own floor and cap to the FTSE based on the logic of cyclical earnings. To find there is an established methodology that backs my thinking is a huge boost.

    I would love to ask how often you update and publish your FTSE 100 CAPE valuation rainbow? I would very much like to see it monthly if at all possible? Or can you recommend any trading software provider who has this an indicator?


    1. Hi Nick

      I tend to publish a market valuation article a couple of times each year. For me that’s probably enough to keep abreast of where the market is.

      I think valuing the market every month is excessive for most people, but if that’s what you want to do then you could calculate the valuation yourself. Just work out the cyclically adjusted earnings (ten-year inflation adjusted average) and plug that into the CAPE ratio using the current index price.

      I hope to put out a market valuation article in January, so that will give you the cyclically adjusted earnings for 2020 (I only update the earnings once per year).

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