2 FTSE 100 big yielders that I’d avoid like the Black Death

Royston Wild warns about a couple of FTSE 100 (INDEXFTSE: UKX) stocks where the risks outweigh the potential rewards. He’d file under “Avoid’!

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In recent days, I took a look at Marks & Spencer Group and explained why, despite its dirt-cheap valuations and gigantic 6%-plus dividend yields, I’m prepared to give it an extremely wide berth.

Another big-yielding share from the FTSE 100 that I’m happy to ignore right now is BHP Group (LSE: BHP).

Like Marks & Spencer, the mining giant’s share price has sprung higher in the starting weeks of 2019, by 11% in fact. Surging iron ore values may have underpinned BHP’s recent charge to five-year highs, but it’s still a business packed with too much risk, in my opinion.

Forecast downgrades to come?

Sure, prices of the steelmaking ingredient may have benefitted in recent weeks from the closure of Vale’s gigantic Brucutu mine in the wake of the tailings dam disaster in Brazil’s Minas Gerais region in January. But the supply/demand picture in the iron ore market remains pretty cloudy in the medium term and beyond as the world’s biggest miners embark on massive production ramp-ups.

And this threatens to deliver a significant smack to BHP’s bottom line given the company’s dependence on a strong iron ore price (the business sources just under half of total earnings from the bulk commodity).

To reinforce my cautious take, City analysts are expecting the Footsie firm to flip from an 8% earnings rise in the fiscal year to June 2019 with a 2% drop in the following year. In fact, I believe medium-term forecasts could be downgraded in the months ahead should signs emerge that Chinese economic cooling is accelerating.

For this reason I’m happy to ignore BHP, despite its cheap valuation, a forward P/E ratio of 13 times, as well as its enormous corresponding dividend yield of 8.3%.

Trimmed guidance signals tough trading

Another FTSE 100 stock that looks tantalising on paper but which could leave you nursing huge losses is Next (LSE: NXT).

I’m prepared to cross the street and avoid Next in spite of its mega-low prospective P/E multiple of 11.3 times. Unlike BHP, City analysts are tipping the business to continue growing earnings — albeit by low single-digit percentages — following the predicted 4% bottom-line rebound predicted for the 12 months to January 2019.

I’m certainly not that confident, though, because of the competitive pressures and squeeze on consumer confidence and shopper spending power on the UK retail sector, issues that are in danger of worsening this year and beyond. This was reflected in Next deciding to cut back its profits guidance following the key Christmas trading period.

I don’t care that Next’s share price has exploded 26% since the turn of 2019. Nor the fact that its forward dividend yield of 3.4% equates to roughly double the rate of inflation in Britain right now. It’s a share that’s packed with too much risk and for this reason I’m avoiding it like the plague.

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Royston Wild 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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