Recent stock market turbulence means that many popular FTSE 100 shares now look shockingly cheap, on paper.
Take NatWest Group (LSE:NWG) for example. The bank now trades on a forward price-to-earnings (P/E) ratio of 5.3 times for 2023. Meanwhile its dividend yield sits at 7.2%.
British American Tobacco (LSE:BATS) shares also offer a tasty blend of low P/E ratios and big yields. For this financial year, these clock in at 6.6 times and 9.6% respectively.
So are these FTSE stocks two of the index’s greatest bargains right now? Or are they investor traps that are best avoided?
NatWest: cheap but risky
Buying banking shares could be seen as highly appealing right now. As interest rates rise, the profits they make on their lending activities are also improving. Higher rates widen the difference between the interest these firms pay to savers and what they charge borrowers.
This is known as the net interest margin (NIM), and NatWest’s soared to 3.27% in the first quarter from 2.45% a year earlier.
There seems to be plenty of scope for more interest rate hikes too, given how stubbornly high UK inflation remains.
However, the drawbacks of higher rates on NatWest’s overall operations threatens to outstrip the benefit to its NIM. Demand for its services could slump as the economy cools. At the same time loan impairments (which rose another £70m in the first quarter) are in danger of steadily increasing.
A meltdown in the mortgage market poses a particularly large threat to NatWest. It’s the country’s second-largest home loan supplier after Lloyds, and it faces a sustained drop in applications as borrowers’ costs soar. Troublingly, the Royal Institution of Chartered Surveyors (RICS) says new homebuyer enquiries crashed to eight-month lows in June.
Of course, the bank could also see impairments explode as existing mortgage holders struggle. The Bank of England predicts that 1m homeowners will have to spend an extra £500m on mortgage costs over the next three years. This will be impossible for many borrowers.
BATS: no smoke without fire?
Would I be better off buying British American Tobacco shares then? Cigarette manufacturers have traditionally been popular during tough economic times. This is thanks to the addictive nature of their products and the excellent profits visibility this brings.
I’d stay well away from the tobacco titan too, however. As a long-term investor I’m concerned about sinking revenues here as society steadily becomes ‘smoke free.’ Analysts at Citigroup predict that smoking in the US, Australia, and parts of Mainland Europe and Latin America will be extinct by 2050, Bloomberg has reported.
Big Tobacco continues investing heavily in thermal heating products and vapour technologies to offset these declines and drive profits. British American Tobacco’s own Vuse brand is winning market share and performing strongly in new territories.
Yet there’s also a large cloud hanging over these new technologies. A raft of scientific data shows that they also carry health risks to users. As a result global regulators are also clamping down hard on the sale and the usage of such products.
This is why British American Tobacco’s share price also continues to fall. Like NatWest, I’m happy to avoid it and buy other cheap FTSE 100 shares for my portfolio.
