I’m hoping to have new funds to invest in the coming weeks. So I’ve been searching the FTSE 100 for the best value stocks to add to my investment portfolio.
The following British blue chips trade on price-to-earnings (P/E) ratios lower than the FTSE average. They also offer forward dividend yields above the index’s mean reading.
Which would be the better buy for me right now?
Tesco
Today Britain’s biggest retailer is back in the news over speculation about possible asset sales. Sky News reports that Tesco (LSE:TSCO) is considering offloading its banking division for a price of up to £1bn.
This could be good news for the supermarket’s shareholders. It would give the business more financial clout to invest in prices and thus better take on the discounters. An asset sale could also boost the level of dividends it awards in the short term.
But even if Tesco Bank does find a new owner it won’t be a gamechanger for me as a potential investor. I think the business could struggle to generate decent profits in the years ahead as competition increases.
Discount chains Aldi and Lidl are both embarking on rapid store expansion. Aldi is opening two new stores in the next month alone and recruiting hundreds of new workers across its distribution centres.
At the same time, Tesco’s new and established rivals are spending heavily on their online operations to steal customers away. Internet giant Amazon specifically threatens to be a significant disruptor for the FTSE firm. Chief executive Andy Jassy has also told the Financial Times that the company plans to “go big” with its Amazon Fresh physical stores.
Today Tesco’s share price trades on a forward P/E ratio of 14.1 times. It also boasts a 4.2% dividend yield. However, the long-term threat to margins that it faces makes it a value stock I’m keen to avoid.
Taylor Wimpey
I’d be happier to add more Taylor Wimpey (LSE:TW) shares to my investment portfolio. And it’s not just because the housebuilder offers better value for money on paper.
The company trades on a P/E ratio of 12.4 times for 2023. It carries a juicy 7.% dividend yield as well.
I think Taylor Wimpey is a better bet for both long-term capital appreciation and dividends. I believe that earnings here could rise sharply as the population expands and demand for new homes inevitably increases. The National Housing Federation says that 145,000 new homes are needed each year through to 2031.
I’m not tempted to buy more Taylor Wimpey shares just yet, though. This is because I think dividends could disappoint in the nearer term as Britain’s housing market struggles. Average asking prices rose just £14 year on year in February, according to Rightmove. This was the lowest rise on record.
Right now I’d rather buy other FTSE 100 shares for dividend income in 2023. However, I will be looking for reasons to add to my Taylor Wimpey stake as the year progresses.
