I think these low-cost FTSE 100 dividend stocks might be classic value traps. Here’s why I’m steering well clear of them.
Barclays
Banking stocks have been badly battered in recent days. The carnage could go on too as worries over the US and European financial sectors persist.
FTSE 100-quoted Barclays (LSE:BARC) is one UK bank that’s sunk sharply. Susannah Streeter, analyst at Hargreaves Lansdown, notes that “London-listed banks are groaning under a weight of worry about just how much value their large bond holdings will have dropped by.”
It’s early days and so it’s not yet clear how much danger Barclays faces. But I’m still avoiding the high street bank, regardless of these more recent developments.
The business faces sustained profits weakness as the British economy toils. Bad loans (which soared to £1.2bn last year) threaten to keep rising, while revenues may reverse sharply as interest rates come down.
Last week, the Organisation for Economic Co-operation and Development (OECD) said it expected domestic GDP to drop 0.2% in 2023. It also predicted a meek 0.9% rebound next year. This would make Britain the worst-performing G20 country (bar Russia) over the next two years.
I believe Barclays’ huge corporate and investment bank could deliver robust profits growth over the long term. Yet this is not enough to encourage me to invest, given the bank’s other troubles.
Today, its shares are on a forward price-to-earnings (P/E) ratio of just 4.7 times. They also command a FTSE 100-beating 6.3% corresponding dividend yield. This is cheap, but not cheap enough for me.
Tesco
Retail giant Tesco’s (LSE:TSCO) shares also offer terrific all-round value on paper. They trade on a prospective P/E ratio of 11.5 times and offer a 4.6% dividend yield. This is north of the 3.7% FTSE 100 average.
Buying shares in a major supermarket like this can have significant benefits. Larger companies carry significant economies of scale that provide a big boost to profits by keeing costs low.
This particular grocer commands exceptional customer loyalty too. Thanks to its decades-old Clubcard loyalty scheme, people continue flocking through its doors to get good discounts.
Yet Tesco isn’t immune to competitive threats. In fact, the steady growth of discounters Aldi and Lidl is one reason I won’t buy the company’s shares today.
Established supermarkets are having to frantically slash prices to compete with the expanding low-cost chains. This is having a devastating impact on the profits Tesco et al make on their colossal sales.
At the same time, margins are being squeezed by rising costs. Aldi last week raised its shop workers’ pay for the fourth time in just over a year. And wages across the industry look set to keep rising as worker shortages drag on. Elevated energy and product costs also look set to linger for some time.
There are plenty of cheap dividend shares for me to buy following recent market volatility. So I’m happy to leave Tesco and Barclays on the shelf and choose other value stocks.
