The FTSE 100 continues to soar and on Thursday struck a fresh all-time peak around the 7,500-point mark. However, London’s premier share index still remains packed with top-class value stocks despite recent strength. A large number trade on depressed price-to-earnings (P/E) ratios whilst some also carry market-topping dividend yields.
Here are two blue-chip stocks that have caught my eye. Should I buy them for my Stocks and Shares ISA? Or do their low paper valuations suggest something sinister?
NatWest Group
High-street bank NatWest (LSE:NWG) trades on a P/E ratio of 6.7 times for 2023, while it also offers up an 5.4% dividend yield.
But like other high-street banks such as Lloyds and Barclays, I’m not tempted to add this FTSE 100 share to my portfolio. These companies have huge exposure to the British economy and they face a tidal wave of bad loans as the country flirts with recession.
I’m concerned for major mortgage lenders like NatWest too as home loan costs spiral. Trade association UK Finance estimates that 715,000 households will see their home loan costs balloon by an average of £588 now with interest rates now at 4%. This raises the spectre of additional defaults that could worsen as the Bank of England hikes its benchmark rate.
The danger is stark for NatWest given its position as Britain’s second-largest mortgage provider (after Lloyds).
On a brighter note, the bank’s drive to improve its digital capabilities is paying off handsomely (around 60% of its retail customers now conduct their business via NatWest’s mobile app or website). This is a promising omen as most modern banking consumers demand a slick online proposition.
But on balance I think the risks of owning this FTSE 100 share outweigh the potential rewards.
BP
News has been more promising for BP (LSE:BP.) in recent days. In fact it was the biggest FTSE 100 riser on Friday as Russia announced plans to cut oil production next month.
The country will slash crude output by 500,000 a day in response to Western sanctions, it said. The news drove the Brent oil benchmark back up $85 per barrel as worries of fossil fuel shortages grew.
Robust energy values propelled BP’s profits to record levels in 2022. Prices could remain elevated for as long as the war in Ukraine drags on, too.
Yet I’m not prepared to buy the oil major’s shares for my portfolio. Not even a low P/E ratio of 6.3 times or 4% dividend yield are enough to tempt me.
I believe the company’s low valuation reflects the risks it poses to investors. Oil prices could easily retrace sharply from current levels if key economic indicators remain volatile and central banks keep hiking interest rates.
Soaring demand for green energy also poses colossal challenges to BP. While the oil major is increasing spending on renewables and alternative energies, it relies on fossil fuel production to drive the bottom line. Profits and thus dividends could disappoint over the next decade as the world moves away from dirtier fuel sources.
