Even for canny investors there are value traps across the FTSE that look like stonking bargains but will sink your portfolio into the red if you give them a chance.
There are plenty of good places to invest your capital for long-term riches, from blue-chip belters on the FTSE 100 to high growth stars in the AIM market. These two are not those, in my opinion.
With a market-smashing 5.8% dividend and trailing price-to-earnings ratio of just 10.8, multinational FTSE 100 travel operator TUI (LSE:TUI) looks at first glance like an undervalued superstar and a strong long-term hold.
Looking under the bonnet, however, I see significant weakness that makes me nervous.
The company was hurt by the Boeing 737MAX safety scandal and while that is now mostly passed, TUI’s short-term assets of €4.3bn do not cover its liabilities due within one year. Not by a long shot. In fact TUI is underweight to the tune of €3.1bn.
Profits dropped 28% from 2018 to 2019 (from €965.8m to €691.4m), earnings per share fell from €1.16 to €0.89, and the total dividend paid per share fell by a quarter from €0.72 to €0.54. Over the same period net profit margins sank from 3.7% to 2.2%, which means each sale has cost the company significantly more.
Earnings per share falling over the last two years from a 2017 high is a cause for concern and forecast revenue for 2020 of only 3.5% means, if correct, it will be below the average of the wider FTSE 100.
That 5.8% dividend will drop over the next few years, too. TUI announced in December 2019 it was changing its dividend policy, starting in 2021, to pay out between 30% and 40% of its underlying earnings, which means shareholders will get less than they do now. The share price has sunk 30% in the last 12 months, almost exactly the same percentage as it has lost over the last five years.
These uncertainties and low forecast growth mean this stock is an avoid for me right now.
First of all, BT (LSE:BT.A) has a headline 8.75% dividend yield. Count it: 8.75%. For a company the size and history of BT, that’s pretty outstanding. And with the share price falling under 180p in recent weeks, you’ll pay just 6.6 times earnings for your BT shares.
Go down this route, though, and I think you’ll be suffering in a year or two. 8.75% dividends are not sustainable for any length of time, even for a company the size of BT.
Last year’s 6.8% dividend payout came at the cost of the lowest earnings cover BT has seen since 2014.
I would say if the share price continues to wallow in the doldrums then we will be in for a significant dividend drop along the lines of the Vodafone 40% cut in 2019. And then the share price will follow.
I’ve written before about the pensions shortfall BT faces, with £907m scheduled to come out of the firm’s earnings every year from 2023 to 2030. And we’re already seeing the strategic fallout from BT’s heavy debt pile: in June 2019 it announced it would close 270 offices around the UK, 12 months after putting forward plans to cut 13,000 jobs, or around 12% of its workforce.
Q3 2019 results are due out Thursday 30 January so you may want to wait to hear that news before making a decision, but this one is a long-term avoid from me.
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Tom Rodgers has no position in any of the shares 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.