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I think these cheap FTSE 100 Dividend stocks can be classic value traps. Here’s why I stay away from them.
barclays
Bank stocks have been badly hit in recent days. The carnage could continue as concerns persist over the US and European financial sectors.
FTSE 100 listed barclays (LSE:BARC) is a UK bank that has gone under dramatically. Susannah Streeter, analyst at Hargreaves Lansdownnotes that “London-listed banks are grumbling under the weight of concern about how much their large bond holdings have fallen..”
It is early days and it is not yet clear how much danger Barclays faces. But I continue to avoid the high street bank, regardless of these newer developments.
The business faces sustained earnings weakness as the UK economy struggles. Bad loans (which skyrocketed to £1.2bn last year) threaten to rise further, while income may reverse sharply as interest rates fall.
Last week, the Organization for Economic Co-operation and Development (OECD) said it expected national GDP to fall 0.2% in 2023. It also forecast a slight rebound of 0.9% next year. This would make Britain the worst performing G20 country (excluding Russia) for the next two years.
I think Barclays’ huge corporate and investment bank could deliver strong earnings growth over the long term. However, this is not enough to encourage me to invest, given the bank’s other problems.
Today, its shares have a forward price-earnings (P/E) ratio of just 4.7 times. They also have a corresponding dividend yield of 6.3% higher than the FTSE 100. This is cheap, but not cheap enough for me.
Tesco
retail giant Tesco(LSE:TSCO) shares also offer excellent overall value on paper. They operate with a prospective P/E ratio of 11.5 times and offer a dividend yield of 4.6%. This is north of the FTSE 100 average of 3.7%.
Buying shares in a large supermarket like this can have significant benefits. Larger companies have significant economies of scale that provide a big boost to profits by keeping costs down.
This particular grocer also boasts exceptional customer loyalty. Thanks to its decades-old Clubcard loyalty program, people continue to flock to its doors for deep discounts.
However, Tesco is not immune to competitive threats. In fact, the steady growth of Aldi and Lidl discount stores is one of the reasons I won’t be buying the company’s shares today.
Established supermarkets have to frantically cut prices to compete with expanding low-cost chains. This is having a devastating impact on Tesco’s profits et al earn from their colossal sales.
At the same time, margins are squeezed by rising costs. Aldi last week raised the pay of its store workers for the fourth time in just over a year. And it looks like wages across the industry will continue to rise as the worker shortage continues. High energy and product costs also look set to linger for some time.
There are plenty of cheap dividend stocks to buy after the recent market volatility. So I’m happy to leave Tesco and Barclays on the shelf and pick other value stocks.
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