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These Footsie dividend stocks look dangerously overvalued

Despite signs of increasingly-challenging conditions for the UK retail sector, Marks & Spencer (LSE: MKS) has enjoyed something of a share price renaissance in recent sessions. M&S has added almost 10% in value in the past month alone, and is now dealing at levels not seen since last May.

In a bid to mend its embattled clothing operations, M&S announced last week that it had made Halfords chief executive Jill McDonald head of its non-food operations. However, many have questioned McDonald’s appointment given her lack of prior experience in the clothing arena.

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Despite huge investment in its ranges in recent years, it has failed to shrug off its reputation of selling over-priced and unfashionable items, and McDonald will have her work cut out to turn this around.

If this challenge wasn’t daunting enough, she will have to tackle the problem against a backcloth of intensifying competition from its mid-priced high street rivals, not to mention an environment of rising inflation which is steadily denting shoppers’ spending power.

Recent share price strength leaves M&S dealing on a forward P/E ratio of 13.3 times, but I would consider a reading around or below the value benchmark of 10 times to be a fairer price given the uphill task the retailer faces to get sales of its non-edible goods firing again.

And investors should also treat a predicted 18.3p per share dividend (yielding 4.9% and up from 17.9p in the year to March 2017) with suspicion, given that Marks & Spencer is expected to endure a third successive earnings dip in the present period.

Driller in a hole?

The outlook for oil majors like BP (LSE: BP) is also less-than-rosy as supply from North America threatens to keep inventories chock full of unwanted material.

More than 700 rigs are now in operation in the States, according to recent Baker Hughes numbers, with the total number at their highest for more than two years. So while US oil inventories have ticked lower more recently, stockpiles could well remain locked around record levels as the drills continue to be plugged back in.

Indeed, with many shale producers remaining profitable well below current prices (Brent values have slumped back below $50 per barrel in recent sessions), there is still plenty of encouragement for levels to keep gushing.

BP announced late last month that profits on an underlying replacement cost basis boomed to $1.5bn in January-March from $532m a year earlier, thanks to the healthy oil price uptick more recently. But hopes of further traction in crude values are built on sandy foundations, as production growth elsewhere offsets the impact of recent freezes by OPEC and Russia.

And I do not believe BP’s shaky earnings outlook is reflected by a forward P/E ratio of 17.3 times.

Dividend hunters may take comfort in an abundant 7.1% forward dividend yield however, created by predictions of another 40-US-cent-per-share reward.

But while extra asset divestments and cost reductions may allow BP to meet 2017’s forecast as the company has set sales targets of $4.5bn-$5.5bn, and capital expenditure of $15bn-$17bn, for this year, I believe its reputation as a go-to stock for income chasers could come under pressure further out should crude prices fail to meaningfully recover.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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