The FTSE 100 is packed with top dividend shares to buy right now. However, London’s premier stock index also contains many value traps that are waiting to catch investors out.
Here are two large-cap UK shares I won’t touch with a bargepole.
Barclays
Rising interest rates have boosted the profits that Barclays (LSE:BARC) and its peers have made from their lending activities. At the moment these they required to pass on the benefits of higher rates to savers, meaning the difference in the interest they pay out and what they charge borrowers has ballooned.
This is known as the net interest margin (NIM). And stubbornly high inflation means the Bank of England’s benchmark is on course to keep rising in the second half too, pushing the margin ever higher.
But the likes of Barclays — whose NIM rose 0.56% in the first quarter, to 3.18% — are under increasing pressure to raise interest rates. The Financial Conduct Authority is to meet with the heads of Britain’s biggest banks this week and has the power to change rules if it chooses.
This would be a big concern to me as an investor in one of the UK’s big banks. These businesses may struggle to generate profits otherwise as weak economic conditions damage demand for their financial products. Barclays and its peers also face a tough time as loan impairments grow (bad loans here jumped by £113m in the first quarter).
Today Barclays shares trade on a forward price-to-earnings (P/E) ratio of just 4.7 times. They also carry a 5.9% dividend yield. But the banks cheap valuation reflects the high level of risk it exposes investors to.
BT Group
Telecoms giant BT Group (LSE:BT-A) faces some of the same challenges as Barclays. This is why I’m also avoiding it despite its low P/E ratio of 6.8 times for 2023 and its bulky 6% dividend yield.
Like the FTSE bank, it has no overseas exposure to help it grow profits when the UK economy struggles. This is one reason why revenues and pre-tax profits dropped 1% and 12% during the 12 months to March.
BT also operates in a highly competitive market where regulatory pressure is rising. In fact Ofcom is taking an increased interest in the activities of the sectors largest players.
The regulator has launched investigations into contract sales at telecoms businesses and the inflation-busting price hikes they introduced during spring. More trouble could be coming their way down the line as criticism over service levels rise.
I’m also concerned about the colossal amount of net debt the FTSE firm has on its books (£18.6bn as of March). The huge cost of its 5G and broadband rollout programme means levels could continue climbing. This could put the company’s growth plans and future dividend levels under pressure.
On the other hand, BT’s expansion programme could give it the edge against its rivals. It could also give profits a huge boost in what our increasingly digital-dependent age. Yet on balance I believe the risks of buying this dividend stock are too high.
