These cheap FTSE 100 income stocks are classic value traps, in my opinion. Here’s why I plan to avoid them like the plague next month.
BP
BP’s (LSE:BP.) share price has gained ground since the summer as oil prices have risen. While further volatility is likely as the Middle East crisis continues, the fossil fuel major could remain locked in an uptrend as supply worries persist.
Brent values were already marching higher as OPEC+ countries kept production curbs in place and US inventories continued declining.
So why are BP shares trading so cheaply? Today they change hands on a forward price-to-earnings (P/E) ratio of 7.1 times. A 4.3% dividend yield also makes this look like a top value stock to buy.
An uncertain outlook for the global economy as interest rates rise is one reason for the company’s low valuation. But this isn’t the chief reason why I’m avoiding this share today. I’m put off by the threat posed to it by the growth of renewable energy and alternative fuels.
A report last week from the International Energy Agency (IEA) illustrates the scale of the challenge. The body predicted that “we are on track to see all fossil fuels peak before 2030,” while its executive director Fatih Birol said that “the transition to clean energy is happening worldwide and it’s unstoppable.”
BP has invested in clean technologies like wind power as well as alternative fuels including hydrogen, which bodes well for the future. But they make up a fraction of the energy giant’s total profits for now.
And with spending at its low-carbon unit accounting for just 7% of capital expenditure in the first half, I think it poses too much long-term risk.
NatWest Group
Financial products like current and savings accounts, mortgages and credit cards are essential in any well-functioning modern economy. This provides retail banks like NatWest Group (LSE:NWG) with a steady stream of income.
This, in turn, makes them attractive dividend stocks for many investors. Indeed, City analysts expect dividends here to continue outstripping the broader average for UK shares.
However, the scale of the difficulties facing the British economy make this blue-chip share one to avoid, in my book. It’s not just that broader loans demand can grind to a half in tough times. It’s that loan impairments can also rocket as people struggle to make ends meet.
This was perfectly demonstrated by fellow FTSE 100 bank Barclays last week. It racked up a further £433m worth of charges in Q3, up 14% year on year, and taking the total since 1 January to £1.3bn.
NatWest hasn’t been hit nearly as hard by loan charges. It recorded £223m worth in the first nine months of 2023, so that’s good news. But with interest rates tipped to keep climbing and Britain flirting with recession, the number of bad loans is likely to remain uncomfortably high.
Unlike HSBC and Santander — both of which have significant emerging market exposure — NatWest can’t look to overseas territories to offset problems at home. This also threatens to limit profits (and thus dividend) growth over the longer term.
So I’m not impressed by the bank’s low forward P/E ratio of 4.7 times and 8.5% dividend yield. I’d rather buy other cheap UK shares today.
