7% yields and P/Es below 12! Yet I wouldn’t touch these 2 income shares with a bargepole!
Loads of FTSE 100 income shares look incredibly tempting after recent stock market volatility.
Two in particular look massive bargains. Their share prices have plunged, the dividends have shot up and their valuations have plummeted. For a contrarian investor like me, this should be a gift. But not every gift is worth unwrapping.
The Schroders share price can’t stop falling
Schroders (LSE: SDR) has an impeccable pedigree. It’s been managing money since the Napoleonic Wars and still looks the part, with assets under management nudging £779bn. Its shares currently yield a meaty 6.86% and trade at just under 12 times earnings. What’s not to like?
The shares have fallen 15% in the last year but this isn’t just down to Donald Trump’s trade tariffs. They’re down 40% over three years and now trade near 10-year lows. This suggests its problems have deep roots.
Schroders has been caught between two worlds: too expensive to compete with index trackers and ETFs, too old-school to rival private equity.
Its 2024 results were respectable. Statutory profit before tax climbed 14% to £558.1m, and net new inflows came from high-margin areas like wealth management.
But operating profit still fell 3% due to lower fees and rising costs. A £150m cost-saving plan is under way, with new chief executive Richard Oldfield promising a transformation and more focus. Ambitious targets include reducing its cost-to-income ratio and winning £20bn of fresh capital for its alternatives arm.
Can he deliver? The jury is out. The firm hasn’t found a compelling modern identity, and while the dividend is being held steady, growth looks slow and fragile.
If Schroders does manage a turnaround, it could make a cracking recovery story. But after so many false dawns, I’m wary.
WPP offers income but with strings
Media giant WPP (LSE: WPP) also looks cheap, trading at just over 10 times earnings with a generous 7.34% yield. The shares have plunged 30% over the last year but again, that doesn’t make them an unmissable bargain.
The advertising giant has been battling structural changes ever since inspirational driving force Martin Sorrell left under a cloud in 2018. Clients are spending less, markets are cautious and digital rivals have eroded its once-dominant position.
Full-year figures in February were mixed at best. Reported revenue fell 0.7%, while like-for-like revenue dropped across key markets including the UK and China.
Growth from media arm GroupM was encouraging, but performance across its integrated agencies weakened. As with Schroders, parts of the business are modernising, others risk being left behind.
Again, WPP is taking action. It’s investing £300m in its WPP Open platform to push deeper into AI and data, while cost savings have lifted margins.
It’s not all gloom. Its 2024 operating profit rose nearly 150%, largely due to one-off disposals, while net debt fell and cash flow improved.
However, the board expects revenues to remain flat or even decline again in 2025. The dividend may be safe for now, but WPP needs a clearer path. And a stronger global economy.
Like Schroders, WPP has looked tempting for too long, without delivering on its potential. I’ll resist those high yields and low P/Es. They’ve both still got a long way to go.
The post 7% yields and P/Es below 12! Yet I wouldn’t touch these 2 income shares with a bargepole! appeared first on The Motley Fool UK.
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More reading
- Here’s a 5-stock FTSE 100 portfolio that could generate £800 a month in passive income
- Down 27% in 3 months and yielding 6.5%! Is this beaten-down UK share perfect for a high-risk ISA?
- Here’s how an investor could use their £20k ISA to target a second income of £1,200 in year one
- Should I buy the worst-performing stock on the FTSE 100 for its 6.4% dividend yield?
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
