These FTSE 100 shares have fallen sharply in value since the spring. Should value investors like me snap them up?
Dodgy foundations
Housebuilder Barratt Developments (LSE:BDEV) is a Footsie share I’ve owned for years. But I have no plans to increase my stake in the business any time soon.
Make no mistake, the long-term outlook for the new-build market remains robust. More and more new homes will be needed as Britain’s population increases. And prices of these new properties could climb sharply as the rate of new supply looks set to lag the growth in demand.
However, the chances of a painful correction in the near term market are rising. And this, in turn, could scupper developers’ growth plans and damage near-term dividends as balance sheets come under pressure.
Rightmove said today (16 October) that home sales slumped 17% year on year in October, while average prices increased at the slowest pace since 2008.
A steady flow of interest rate hikes are choking homebuyer demand. And it seems that the Bank of England isn’t finished yet.
Today, its chief economist Huw Pill said: “We still have some work to do” to pull inflation back to the bank’s 2% target.
Currently, Barratt shares trade on a forward price-to-earnings (P/E) ratio of 15.2 times. They also carry a 3.9% dividend yield. Neither of these readings are attractive enough to make me consider upping my stake.
Another rate hike casualty?
Interest rate hikes are usually great news for banks. They widen the difference between what these companies charge borrowers and the interest they offer to savers. This is known as the net interest margin (or NIM).
So why has the Lloyds Banking Group (LSE:LLOY) share price sunk from the 2023 highs reached in February? It’s been a big beneficiary of prolonged monetary tightening in recent times.
Latest financials showed pre-tax profit up 17% between January and June, to £2.9bn, as net income rose 11% year on year. This was driven by a jump in the bank’s NIM, to 3.18% from 2.77% a year earlier.
The trouble is that sustained interest rate rises are starting to cause more problems than benefits. Lloyds racked up £662m worth of loan impairments in the first half as individuals and businesses struggled to make repayments. That was up from £377m a year earlier. Loans and advances, meanwhile, are also drying up.
The FTSE firm is especially vulnerable to the downturn I mentioned in the housing market. It has just over £300bn worth of mortgages on its books as of June and thus could face a tsunami of missed home loan payments in the coming months.
With high street banks also facing increased competition from digital and challenger banks the risks of owning such shares is high. This is despite the strong brand recognition that Lloyds and its peers command.
Today, Lloyds’ shares trade on a P/E ratio of 5.9 times for 2023 and carry a 6.4% dividend yield. But I believe this rock-bottom ratio fairly reflects the dangers the FTSE bank poses to investors in both the short term and beyond.
