These cheap FTSE 100 income shares trade on rock-bottom earnings multiples. But which of them should I buy this month?
Lloyds Banking Group
Lloyds (LSE:LLOY) shares remain among the most popular with value investors right now. In fact, the bank was the eighth most bought of all stocks available on AJ Bell’s trading platform in the week to Friday.
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Today, the blue-chip share trades on a forward price-to-earnings (P/E) ratio of 6.3 times. This is well below the prospective average of 14 times for FTSE shares.
Lloyds’ share price also carries huge dividend yields. It sits at 5.8% for 2023, again beating the FTSE 100 average (which stands at 3.6%).
Yet I’m not tempted to buy the Black Horse Bank for my portfolio right now. Further interest rate rises in the coming months will give the profits it makes from lending activities a further boost. However, as in 2022, the benefit of these hikes on group earnings could be washed out by soaring credit impairments.
Fellow high street bank NatWest Group booked an additional £70m worth of impairments in the first quarter, it said on Friday. As the British economy struggles for traction and high inflation persists, bad loans could remain a large thorn in the side.
Unfortunately for Lloyds, it can’t look to overseas markets to push earnings higher. This is in contrast to Asia-focused HSBC, for example, and Santander, which has large Latin American exposure.
And with the UK facing a string of major structural problems — these range from post-Brexit trading friction and low productivity to high public debts — cyclical companies like Lloyds may struggle to grow profits beyond just the next couple of years.
So I’m happy to avoid the FTSE share right now. The bank’s low valuation reflects its gloomy earnings outlook.
Barratt Developments
I’d be much happier to invest my hard-earned cash in Barratt Developments (LSE:BDEV). In fact, following upbeat trading numbers from the industry last week, I’m considering building on my existing stake.
High competition in the mortgage sector is another big problem for banks like Lloyds. But a congested marketplace is helping the housing market to recover from last year’s lows by boosting buyer affordability.
In fact, lending conditions continue to steadily improve. Latest data from Moneyfacts showed the number of mortgage deals rose above 5,000 in April to levels not seen in almost a year.
Fresh trading updates from Taylor Wimpey and Persimmon reinforced confidence that the homes market has turned the corner. Both announced a solid pick-up in buyer interest at the start of 2023.
And I think Barratt could join the club when it updates the market tomorrow (3 May). This could lead to further healthy share price gains.
Today, the builder trades on a forward P/E ratio of 7.5 times. It also carries an enormous 6.7% forward dividend yield.
High construction costs pose an ongoing risk to earnings. Yet on balance, I believe it could deliver exceptional dividend income years into the future. I expect demand for its newbuilds to remain rock solid as Britain’s housing shortage likely persists.
