These dividend stocks offer yields far north of the 3.5% FTSE 100 average. But I believe they pose far too much risk to UK share investors.
Here’s why I think they should be avoided like the plague.
Admiral Group
General insurance giant Admiral Group (LSE:ADM) boasts a terrific 6.4% dividend yield for 2023. But I think share pickers should steer clear of it as claims-related costs hammer earnings.
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Last week Admiral said that 2022 pre-tax profits tanked 39% year on year, to £469m. It was impacted by higher claims frequency and a big leap in claims costs. Worryingly claims inflation looks set to remain an issue too as the Ukraine war continues and supply chain and labour market problems carry on.
I’m also worried by the recent underperformance of the FTSE firm’s international divisions. It said that “very low market average premiums” were a problem in its Italian and Spanish markets last year. It also had to endure “adverse” market conditions in the US.
As for dividends, I think there’s a strong chance that Admiral could fail to pay what City analysts are expecting in 2023.
This year’s projected dividend is covered just 1.1 times by expected earnings, woefully short of the safety benchmark of 2 times and above. If the company misses earnings projections again in 2023 it’s likely that the dividend will suffer.
Admiral may not be able to use its balance sheet to fund large dividends if profits fall short. Its Solvency II ratio fell 15% year on year to 180% in 2022.
On the plus side the business continues to grow customer numbers strongly. These increased to 9.28m last year, up 11% from 2021 levels. But all things considered I believe the company is a risk too far for savvy investors.
Barclays
I’m convinced investors should also avoid Barclays (LSE:BARC) shares despite their solid all-round value. As well as boasting an 6% dividend yield for 2023, the bank trades on a forward price-to-earnings (P/E) ratio of just 4.9 times.
As the UK economy struggles, Britain’s banks could face a strong and sustained rise in loan defaults. Barclays endured £500m worth of bad loans between October and December alone, latest financials showed. This in turn pushed the total for 2022 to £1.2bn.
At the same time providers of financial services face a drop in revenues as consumers tighten their belts. Trade body UK Finance says that demand for personal loans dropped 9% in the final quarter of last year.
On the plus side, credit card spending has remained robust in recent months. But this could create a problem for Barclaycard later on if customers struggle to make repayments.
Barclays’ US operations could help to support profits. Economic conditions there remain stable at the start of 2023. But on balance I believe the risks of owning this FTSE 100 share outweigh any possible benefits.
