Even though the FTSE 100 produced one of its best performances on record in 2019, there are a wide range of stocks that still appear to offer value in the market today.
However, some of these investments aren’t what they seem. With that in mind, here are two FTSE 100 shares that appear to offer value, but could make investors poorer in 2019. Their falling share prices are a reflection of business troubles and not an opportunity to buy.
Global telecommunications giant Vodafone (LSE: VOD) looks like an attractive income investment. The stock currently supports a dividend yield of 5.5%. Unfortunately, it seems as if this distribution is living on borrowed time.
Recent trading updates from the company show it’s struggling in some of its biggest markets. For example, the group’s Indian business recently received a substantial tax demand from the government, which has effectively rendered the division insolvent.
At the same time, despite spending tens of billions of pounds to improve its mobile network across Europe, Vodafone’s sales and profits have stagnated.
What’s more, the company has a substantial amount of debt, which management is trying to bring down by selling off assets. It also cut the dividend in 2019. As Vodafone has to reinvest in its network continually, there’s no guarantee this cut will be enough.
As such, Vodafone’s 5.5% dividend yield looks to be on shaky ground. Despite the group’s efforts to reduce borrowing, the prospect of a dividend cut remains very real, and it seems unlikely the company will be able to instigate a turnaround anytime soon. This suggests the stock’s performance isn’t going to improve.
Another FTSE 100 company investors should avoid at all costs in 2020 is utility supplier SSE (LSE: SSE). This enterprise is facing similar problems to Vodafone.
High levels of borrowing are holding the company back, and recent trading updates from the business confirm it’s struggling to grow in an increasingly competitive utilities market. On top of this, regulators are clamping down on utility providers that earn too much profit. Some of the fallout from this clampdown could hit SSE’s profit margins as regulators try and improve customer value for money.
Despite management’s efforts to try and reorganise the business, SSE’s net profit is still expected to fall from £1.4bn in its 2019 financial year to £860m for fiscal 2020.
This will reduce the company’s dividend cover to around 1.1, according to current projections, even after factoring in an 18% decline in the payout.
Analysts have the stock supporting dividend yield of 5.7% for 2020. Since it also trades on a price-to-earnings (P/E) ratio of 16.8, which looks expensive compared to the utility provider’s projected growth rate, it may be sensible to avoid SSE in 2020.
With so many headwinds facing the business, it doesn’t look as if growth is going to recover anytime soon. Therefore, it could be best to avoid the stock in 2020.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.