I’m searching for the best FTSE 100 value stocks to buy for my portfolio. And these UK blue-chip shares — with their rock-bottom price-to-earnings (P/E) ratios and large dividend yields — have both caught my attention.
Some shares trade on cheap valuations due to gloomy earnings outlooks and/or high risk profiles, though. So are these FTSE shares brilliant bargains or investor traps?
Persimmon
Signs of stabilisation in the UK housing market are growing. As a consequence, I’m tempted to increase my holdings in big-cap builder Persimmon (LSE:PSN).
I might be a bit late to the party. After all, a stream of positive updates from the housebuilding sector has encouraged share prices to rally. Yet at current prices many such shares still offer decent all-round value.
Persimmon, for instance, trades on a forward-looking P/E ratio of 12.3 times. This is below the average of 14 times for FTSE 100 shares. It also sports a index-busting 5.6% corresponding dividend yield.
Nation-wide data on Tuesday showed average UK house prices rise 0.5% in April, the first rise in seven months. This reflects rising buyer confidence and improving affordability thanks to falling mortgage rates.
Persimmon’s recent financials have already pointed to an industry in a state of rebound. A week ago, the business said that “Trading over recent weeks has offered some signs of encouragement with visitor numbers up, cancellation levels normalising and sales rates continuing the steady improvement evident since the start of the year”.
Further Bank of England (BoE) rate rises could scupper this recovery. Indeed, the prospect of more sustained rises have intensified in the wake of recent inflation surveys. Yet at current prices I still find Persimmon shares highly tempting.
NatWest Group
High street banks like NatWest Group (LSE:NWG) also continue to offer solid value. This particular operator trades on a P/E ratio of just 5.6 times for 2023 and offers a solid 6.9% dividend yield.
NatWest also stands to gain from rebounding residential property demand. The business is one of the UK’s top-three mortgage providers by market share.
What’s more, banks like this stand to gain from extra BoE rate hikes. The market is now expecting interest rates to peak at 4.75% this year, up 0.5% from current levels. Higher rates allows banks to make bigger profits on their lending activities.
However, I still believe owning NatWest shares is packed with too much risk. This is because the benefit of higher rates threatens to be overshadowed by a toxic mix of weak revenues and soaring impairments.
Latest Insolvency Service data showed the number of “breathing space” debt arrangements soar to 23,179 during quarter one. This was a 34% increase from the number of people seeking help a year earlier.
The number of individuals and businesses in financial trouble could remain elevated too as the UK economy struggles and high inflation persists. And unlike some other FTSE 100 banks, NatWest doesn’t have significant overseas exposure to offset troubles at home. So I’ll happily avoid this big cap share today.
