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I think these low-cost FTSE100 dividend stocks could be classic value traps. That’s why I stay away from it.
Barclays
Bank stocks have been hit hard in recent days. The carnage could also continue as concerns over the US and European financial sectors persist.
FTSE 100 listed Barclays (LSE: BARC) is a UK bank that sank heavily. Susannah Streeter, analyst at Hargreaves LansdownNote that “London-listed banks are groaning under the weight of concern over the value of their large bond holdings which will have fallen by.”
It’s early days and so it’s unclear just how much Barclays is in danger. But I still avoid the big bank, despite these more recent developments.
The company faces sustained earnings weakness as the UK economy struggles. Bad debts (which soared to £1.2bn last year) threaten to rise further, while earnings could reverse sharply as interest rates fall.
Last week, the Organization for Economic Co-operation and Development (OECD) said it expected domestic GDP to fall by 0.2% in 2023. It also predicted a slight rebound of 0.9% next year. That would make Britain the worst performing G20 country (excluding Russia) over the next two years.
I think Barclays’ huge corporate and investment bank could deliver robust long-term earnings growth. But that’s not enough to encourage me to invest, given the bank’s other difficulties.
Today, its shares have a forward price-to-earnings (P/E) ratio of just 4.7x. They also command a corresponding dividend yield of 6.3% above the FTSE 100. That’s cheap, but not cheap enough for me.
Tesco
Retail giant Tesco(LSE:TSCO) shares also offer exceptional overall value on paper. They trade on a forward-looking P/E ratio of 11.5x and offer a dividend yield of 4.6%. That’s north of the FTSE 100 average of 3.7%.
Buying stock in a large supermarket like this can have significant benefits. Large companies achieve significant economies of scale that dramatically increase profits by keeping costs low.
This particular grocer also commands exceptional customer loyalty. Thanks to its decades-old Clubcard loyalty program, people continue to flock to its doors for great discounts.
Yet Tesco is not immune to competitive threats. In fact, the continued growth of discounters Aldi and Lidl is one of the reasons I won’t buy the company’s stock today.
Established supermarkets have to cut prices frantically to compete with expanding low-cost chains. This is having a devastating impact on Tesco profits et al make on their colossal sales.
At the same time, margins are squeezed by rising costs. Aldi last week raised the wages of its store workers for the fourth time in just over a year. And wages across the industry are expected to continue to rise as labor shortages drag on. High energy and product costs are also expected to persist for some time.
There are plenty of cheap dividend stocks I can buy following the recent market volatility. So I’m happy to leave Tesco and Barclays on the shelf and pick other value stocks.
