These UK value stocks offer low earnings multiples and market-beating dividend yields. So should I buy them for my investment portfolio?
NatWest Group
Sky-high inflation in the UK poses dangers to swathes of London Stock Exchange shares. It means that the Bank of England (BoE) might have to keep increasing interest rates in the coming months and maintain its benchmark higher for longer.
However, Britain’s retail banks like NatWest Group (LSE:NWG) stand to gain from further BoE action. This FTSE 100 share’s revenues leapt 26% in 2022 to £13.2bn as higher rates boosted the margin between the interest it charged borrowers and offered savers.
The City had been expecting another modest rise to 4.25% next month. However, following news that consumer price inflation (CPI) remained elevated at 10.1% in March, the BoE is tipped to raise rates much higher. Former BoE ratesetter Andrew Sentance even told the BBC that a hike close to 6% could be needed.
Yet despite the possibility of higher-than-expected interest rates, I won’t be buying NatWest shares. The benefit of extra BoE rate increases could be more than offset by a surge in bad loans as the domestic economy struggles.
As the country’s second-biggest mortgage lender, NatWest is especially vulnerable to a surge in home loan defaults as interest rates head higher. Across the business, the bank endured £337m worth of loan impairments in 2022.
With the company also facing tough competition from digital banks, I think the risks of owning NatWest shares are too great. Not even a 6.6% dividend yield and forward price-to-earnings (P/E) ratio of 5.8 times are enough to tempt me to invest.
FRP Advisory Group
Further interest rate rises could crush UK businesses struggling to raise finance and repay loans. The number of companies experiencing severe financial distress is already growing rapidly, as Insolvency Service data shows.
There were 2,457 corporate insolvencies in March, it announced this week. That was up 16% year on year and the highest level since the Covid-19 crisis.
Against this backdrop, I think buying FRP Advisory Group (LSE:FRP) shares is a good idea. This AIM share provides a wide range of services to troubled companies including advice on restructuring, debt and pensions.
In February’s most recent trading statement, FRP said the number of restructuring assignments it had received continued to rise. I’m expecting news of further progress when the company releases a full year update in mid-May. It’s an event I think could prompt a positive re-rating of the company’s shares.
Following recent price weakness the company’s shares trade extremely cheaply. They change hands on a forward price-to-earnings growth (PEG) ratio of 0.9. A reminder than any reading below 1 indicates a share is undervalued.
FRP shares also carry a healthy 4.2% dividend yield at current prices. I’d buy the business even though changes to the regulatory landscape might damage future earnings.
