These FTSE 100 stocks offer an attractive blend of low price-to-earnings (P/E) ratios and big dividend yields. Are they excellent dip buys or dreaded investor traps?
NatWest Group
Higher interest rates have been a critical earnings driver since late 2021. Even as credit impairments have soared profits have risen thanks to Bank of England policy tightening.
Take NatWest Group (LSE:NWG) for example. Pre-tax profits here soared 33.5% in 2022, to £5.1bn, as increased revenues offset £337m worth of bad loans. A higher Bank of England benchmark boosts the difference between the interest that banks charge borrowers and offer to savers.
But there is huge uncertainty over how much further policy makers will be prepared to pull rates. Given the state of the UK economy and ongoing market volatile the Bank of England may be increasingly reluctant to tighten further.
Last week interest rates rose for the eleventh straight time, to 4.25%. But analysts at KPMG think rates have likely peaked. Chief economist Yael Selfin commented that the Bank of England’s March increase “is likely to be its last for this tightening cycle.”
Generating decent profits growth could now be a big challenge for NatWest. Revenues might remain weak by historical standards and bad loans continue rising as consumers and businesses struggle. At the same time competition is rising and the challenger banks are tipped to keep eroding the market shares of high street banks.
For these reasons I’m not tempted to buy NatWest shares today. That’s even though they trade on a rock-bottom forward P/E multiple of 6.2 times and carry a 6.4% dividend yield.
The Berkeley Group
Speculation that interest rates may have peaked will be music to the ears of The Berkeley Group (LSE:BKG). Soaring mortgage costs on the back of Bank of England action has sapped homebuying activity in recent months.
Housebuilders like this aren’t out of the woods just yet. The cost-of-living crisis means that home sales could remain under severe pressure. A sharp rise in unemployment might also emerge to cripple the market.
However, I believe the long-term outlook for companies like The Berkeley Group remains robust. This is why I’d buy the FTSE firm for my investment portfolio today.
Weak housebuilding rates in recent decades has created a huge shortage of available homes. And as the population rapidly grows this market dynamic looks set to worsen.
The problem threatens to be particularly bad in London. Analysts at Statista for example think the capital’s population will soar by 800,000 during the next 20 years, to 9.3m. Against this landscape Berkeley — which focuses on London and the surrounding areas — can expect to charge premium prices for its product.
I already own shares in several FTSE 100 housebuilders, so I don’t plan to buy shares in the business any time soon. But I’d consider adding Berkeley to my portfolio if I didn’t already have large exposure to the housing market.
At current prices I think its shares could offer excellent value. They trade on a forward P/E ratio of 9.9 times and offer a tasty 4.4% dividend yield.
