I’m searching the FTSE 100 for the best value stocks to buy. More specifically, I’m seeking blue-chip shares that trade on low price-to-earnings (P/E) ratios and which carry dividend yields north of the 3.7% average.
These two FTSE shares both meet this criteria. But are they really brilliant bargains or classic investor traps?
Barratt Developments
The FTSE 100 housebuilders have long offered dividend yields far above the index average. In fact today, Barratt Developments’ (LSE:BDEV) forward yield of 7.2% is almost twice the blue-chip average.
This particular stock also offers terrific value from an earnings perspective, at least on paper. It currently trades on a rock-bottom P/E ratio of 7.1 times.
I already own shares in the homebuilder. But a steady stream of mixed data from the housing industry means I don’t plan to add to my holdings just yet.
Latest Nationwide data on Friday showed average property prices tanked 3.1% year on year in March. This was the seventh straight month of decline and the biggest drop since 2009.
Barratt said it has witnessed “some early signs of improvement” when it last updated the market in February. Yet I’m seeking evidence of strong and sustained recovery before spending more of my hard-earned cash here.
I plan to cling onto my Barratt shares. The long-term outlook for the newbuild market remains bright as Britain’s population grows. Yet the possibility of dividend disappointment in 2023 (and possibly beyond) means I’m looking for other shares to boost my passive income.
NatWest Group
Theoretically, NatWest Group (LSE:NWG) should also benefit as the UK population increases. Retail banking products like current accounts and mortgages are essential in the modern world.
What’s more, this particular bank has trusted brands including Royal Bank of Scotland and Coutts under its umbrella. These could help it win business in the coming years.
However, NatWest’s long-term outlook is also fraught with danger. The British economy looks set for a prolonged period of weakness that could hamper its ability to grow revenues. Income will also come under pressure as interest rates fall again and competition in the banking industry heats up.
I’m also concerned about a possible explosion in bad debts at the bank. This in turn could impact the level of dividends it pays out in 2023 and later.
Recent research shows that UK households have racked up more than £2trn worth of debt. As the cost-of-living crisis endures and the economy cools, NatWest faces a spike in loan impairments.
The bank has already set aside an eye-watering £337m to cover the cost of bad loans in 2022 alone. And it has seen a significant uptick in provisions in recent quarters.
Not even a low P/E ratio of 6.2 times, or huge 6.4% dividend yield for 2023, are enough to tempt me to buy NatWest shares. There are much more attractive, cheap dividend stocks I’d rather invest in today.
