The FTSE 100 remains packed with low-cost income shares, despite the index’s strong start to 2023. Many trade on rock-bottom price-to-earnings (P/E) ratios and carry market-beating dividend yields.
That said, a great number of FTSE index shares command low valuations because of the high risks they pose to investors. Here are two popular UK blue-chip shares I wouldn’t touch with a bargepole.
Lloyds Banking Group
Brand strength is one of the things billionaire investor Warren Buffett looks for when choosing which shares to buy. This is an especially important quality in the field of financial services. When large sums of money are involved trust becomes paramount.
High street bank Lloyds Banking Group (LSE:LLOY) has brand recognition in abundance, cultivated since its founding in 1695. This provides it with some protection against rival businesses.
But I still wouldn’t buy Lloyds shares. The threat posed by digital and challenger banks remains significant as banking customers head online and increasingly search for better deals.
The likes of Starling Bank and Revolut can roll out more attractive products than established banks due to their lower overheads. Indeed, Mordor Intelligence says a digital bank with decent technological processes has a cost-to-income ratio that’s 10-15% lower than the likes of Lloyds.
Britain’s banks also face significant near-term dangers. As the UK economy shrinks, the number of bad loans on their books threatens to explode. They may also struggle to grow revenues as loans to customers and businesses dry up.
Today, Lloyds’ share price carries a 5.4% dividend yield for 2023. Its shares also trade on a low forward P/E ratio of 7.2 times. But I’d rather buy other cheap FTSE 100 shares for my portfolio.
BT Group
Telecoms giant BT Group (LSE:BT.A) isn’t an alternative blue-chip I’m considering investing in however.
This fellow-FTSE 100 business also faces significant stress in 2023 as households and businesses try to reduce spending. BT operates in a highly competitive environment and the pressures to slash prices look set to grow.
I also have serious concerns about the business as a long-term investor. Its multi-year programme to roll out ultrafast fibre is costing vast sums of money. So is its plan to boost its EE 5G mobile network.
Capital expenditure rose 3% in the nine months to December, to £3.9bn. Worryingly, these programmes have a long way to run too. The business still has 15.4m premises to connect to its ultrafast broadband by 2025.
This could significantly impact the level of dividends it can afford to pay out in the years ahead. The danger is especially high, given the huge debts the company needs to repay too. Net debt moved above £19bn in December.
There are potential benefits in the company’s expansion programme. And its low forward P/E ratio of 6.4 times and 5.9% dividend yield are appealing.
But like Lloyds, I think BT shares pose too much risk to investors right now.
