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2 high-risk FTSE 100 stocks I’d probably avoid

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The UK’s leading stock index, the FTSE 100, is comprised of the largest public companies in the country. But just because a company is featured in the index, it does not mean that the shares are without risk. Indeed, even the UK’s largest public companies are still subject to the ups and downs of business, and some are faring much better than others.

Intu Properties (LSE: INTU) is facing imminent relegation from the UK’s leading index as the owner of some of the largest shopping centres in the UK feels the heat from online peers such as Amazon.

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Over the past 12 months, shares in the company have lost nearly 10% excluding dividends and now trade at a 32% discount to the book price of Intu’s properties.

As property is generally considered to be a defensive asset, such a gaping discount shows just how pessimistic investors are about Intu’s prospects. The company’s customers, namely retail brands that own space its shopping centres, are facing multiple pressures, such as the rising minimum wage for their staff, stagnant wage growth among their own customers, and the impact of e-commerce on profitability. Put simply, this is bad news for Intu. The company needs to keep rental income flowing to continue to service its debt, which it has had problems with in the past. With trends in the retail sector changing, lenders may be less inclined to offer the company a helping hand this time around.

Attractive dividend

The one redeeming feature of Intu is its dividend yield, which currently stands at 5.1% and is covered by earnings per share. However, while this yield may look attractive in the low-interest-rate environment, it’s worth considering how much longer the company will be able to return so much income to investors considering the pressures facing the business.

All in all, this is one FTSE 100 business I would avoid.

Consumer pressure

Merlin Entertainments (LSE: MERL) is another FTSE 100 champion I’m not keen on.

Merlin has achieved steady growth over the past four years with earnings per share rising from 16.9p to 20.8p for 2016. City analysts are projecting further earnings growth of 6% for 2017 and 15% for 2018, taking earnings per share to 25.5p. Pre-tax profit is expected to come in at £350m for 2018, up from £172m for 2013.

Nonetheless, despite this growth, shares in Merlin look expensive. At the time of writing the shares trade at a forward P/E of 22.8, falling to 20 for 2018. As noted above, it’s no secret that rising inflation and stagnating wages are putting pressure on consumers and as this trend continues, it is reasonable to expect people will give up luxuries such as expensive visits to Merlin’s attractions.

Consumer demand is unlikely to drop off completely overnight but even a slight slowdown would be extremely damaging for Merlin’s share price considering the high growth multiple the market is awarding the business.

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Rupert Hargreaves has no position in any 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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