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Two FTSE 250 income stocks yielding 5%+ I’d buy for a second income

Rupert Hargreaves — Tue, 11 Jun 2019 10:08:10 +0000

Shares in homebuilder Crest Nicholson (LSE: CRST) ticked lower in early deals this morning after the firm reported a decline in profit for the first half of its financial year.

According to is its earnings release, profit before tax declined by 11% to £64.4m in the six months ended 30 April, even though revenue increased 7% to £501.9m.

Falling property prices have hit Crest in London where its focus has been for the past decade. To work around the property slowdown in the capital, management has tilted the business towards partnerships and joint ventures. While hitting profitability, the move de-risks the group’s balance sheet by ensuring a set number of homes will be sold before completion.

Surrendering some of the profit on each sale as part of these agreements also means the firm’s operating profit margin decreased 2.7% during the first half.

A worthwhile trade-off

In my view, this is a worthwhile trade-off. Giving up some profit in return for guaranteed sales might not be good for profit margins in the short term, but over the long term, the deals should help the business ride out the peaks and troughs of the cyclical property market.

On top of this, Crest is well financed and highly profitable. Management believes the group will have a net cash balance after payment of dividends to investors at the end of its 2019 financial year.

All of the above leads me to conclude that Crest’s dividend is here to stay for the foreseeable future. With the stock currently yielding 9.2%, it looks to me to be one of the best income plays in the FTSE 250 right now. If you’re looking to build a second income from dividend shares, this company should be on your watchlist.

Booming demand

Another investment I think you should consider if you are looking to build a second income with dividend stocks is Bellway (LSE: BWY).

Like Crest, Bellway is benefiting from the chronic housing shortage in the UK. The group has seen an increase in sale reservations of 4.7% year-on-year to 244 per week, up from 233 a week in the same period last year. The number of people cancelling reservations has also declined, falling to 12% between August and February 2019, from 13% in March last year.

Off the back of these market trends, in a trading update published today, management confirmed it’s on track to hit growth forecasts for 2019. For its part, the City is expecting the group to report earnings per share of 438p on a net profit of £537m. If Bellway achieves these targets, then the stock is currently dealing at a bargain basement forward P/E of just 6.5. On top of this, the shares support a dividend yield of 5.2%, and the distribution is covered nearly three times by earnings per share.

Once again, these metrics give me the confidence to say I believe you should consider Bellway as an investment if you’re looking to build a second income stream with dividends.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

2 ‘high-yield’ FTSE 250 stocks I’d buy for an ISA now

Rupert Hargreaves — Fri, 05 Apr 2019 09:53:52 +0000

If you are looking for high yield dividend stocks to include in your ISA today, I highly recommend considering Crest Nicholson (LSE: CRST) and Sabre Insurance (LSE: SBRE).

Undervalued

These two companies are both specialists in their own respective industries and have adopted a policy of returning as much as possible to investors, which is great news for income seekers.

On top of their attractive income credentials, both companies trade at discount valuations. Crest, for example, is currently dealing at a forward P/E of 7.8. Meanwhile, shares in Sabre are changing hands at a forward P/E of 13.8. This might look expensive at first glance, but considering the fact the company reported an operating profit margin of just under 32% last year, I think the company is undervalued.

Indeed, Sabre’s insurance peer Admiral, which last year reported an operating profit margin around the same level, is currently changing hands at a forward P/E of approximately 16.

Specialist businesses

As mentioned above, both Crest and Sabre operate relatively unique businesses in their own industries.

While most of the listed homebuilders are concentrating on supplying the affordable end of the housing market, where property prices range between £150,000 to £300,000, Crest’s focus is on the middle section of the market. The group sold just over 3,020 homes last year at an average selling price of £393,000. Of these, 637 homes qualify as affordable, which drags down the average slightly.

Sabre is also targeting a premium market. In the highly competitive UK motor insurance market, its business is “biased toward the specialist, higher premium segments,” which has translated into strong growth for the company over the past five years.

The fact that both Crest and Sabre target premium segments of their respective markets is, in my opinion, great news for income investors. Premium segments of any market tend to be less susceptible to recessions and economic downturn, implying these companies should continue to generate steady profits even in the most uncertain times. That’s great news for income-seeking investors.

At the same time, both companies are reporting above-average profit margins. As I noted earlier, Sabre’s profit margins are some of the highest in the UK insurance market. Crest’s five-year average operating profit margin is approximately 19.5%, according to my calculations, which is nearly double the current homebuilding industry average of 9.2%.

Best income stocks

Both companies’ market-leading profit margins should mean that their market-beating dividend yields are here to stay for the foreseeable future. At the time of writing, shares in Crest support a dividend yield of 8.3% and shares in Sabre yield 6.9%. Additionally, both companies have a positive net cash balance, giving them headroom to sustain the payout, or even increase it if the going gets tough.

So overall, these two companies have market-beating dividend yields, attractive valuations, and sector-leading profit margins. Combined, all of these factors tell me they’re great high-yield stocks to include in your ISA. I don’t think they’ll let you down.

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I’d buy these two 10%-yielding FTSE 250 dividend stocks before the rest of the market

Rupert Hargreaves — Wed, 30 Jan 2019 09:59:39 +0000

Shares in homebuilder Crest Nicholson (LSE: CRST) have lost around a third of their value over the past 12 months, underperforming the FTSE 100 by approximately 20% excluding dividends.

Investors have been selling because they are worried that, after several years of explosive earnings growth, Crest is heading for a prolonged slowdown. Indeed, management confirmed only yesterday that full-year 2018 pre-tax profit declined 15%, thanks to growing challenges in the London market. To cope with these challenges, management has taken “decisive action” to cut costs, slow its building programmes and run the business for cash.

Usually, I wouldn’t recommend a company with falling earnings as a dividend investment, but Crest’s decision to run the business for cash has grabbed my attention.

Cash cow

By focusing on cash generation rather than chasing growth in a weak property market, I believe Crest is making the right decision for its investors. You see, not only is the company facing weaker demand for its high-end properties, but costs are also increasing (operating margins declined from 20.3% in 2017 to 16.7% for 2018). So, if Crest continues on its current trajectory, these numbers tell me the group is only going to be selling fewer houses at a lower price with higher costs, which ultimately means lower profit margins and lower profits.

In this environment, conservatively running the business, maximising profits for investors and concentrating on cash generation, seems like the right thing to do. Under this strategy, City analysts are forecasting net cash will hit £85m in 2019, £103m in 2020 and £114m in 2021, that’s assuming the dividend is held steady at 33p per annum (a yield of just under 9% at the current price).

Not only do these figures show that the company should be able to maintain its current divided, but it implies there’s room for growth as well.

That’s why I think it could be worth buying Crest today before the rest of the market catches on to the opportunity.

Surging earnings

The other undervalued FTSE 250 dividend stock that I think it is worth buying today is Crest’s peer, Bovis Homes (LSE: BVS).

Unlike Crest, Bovis hasn’t reported a slowdown in demand for its properties, primarily because the company concentrates on the more affordable end of the market, where the government’s Help to Buy scheme is still encouraging robust demand. After a healthy 2018 — management expects to report a profit ahead of City expectations — initial signs for 2019 are already “encouraging” according to the firm’s January trading update.

This is all great news for dividend investors, mainly because the enterprise is already flush with cash. At the halfway point, Bovis reported £43m of cash on its balance sheet, a number that I expect has risen substantially over the last six months as cash flows are historically second-half weighted.

As the group’s cash balance expands, the City is expecting the stock’s dividend yield to hit around 10% for the next two years. A modest valuation of just 9.6 times projected 2019 earnings only sweetens the appeal here in my opinion. What’s more, as my colleague Harvey Jones recently pointed out, the shares could be set for a strong bounce if we get a soft Brexit.

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Can you afford to ignore this FTSE 250 dividend champ yielding 9.1%?

Rupert Hargreaves — Mon, 12 Nov 2018 11:55:52 +0000

Home-builder and FTSE 250 dividend champion Crest Nicholson (LSE: CRST) has seen its share price plunge 35%, excluding dividends, year-to-date, underperforming the index by 26.5%.

Distributions to investors have cushioned the decline slightly over the past 12 months. Since mid-November 2017, the stock is down 23%.

While the recent declines are disappointing for existing investors, they have pushed the dividend yield on the shares up to 9.1%, significantly improving Crest’s attractiveness for income seekers.

The question I’m planning to answer today, is whether or not I feel it’s worth buying shares in Crest for its income after recent declines?

On the rocks

As my colleague Andy Ross recently highlighted, investors have been dumping shares in Crest for several reasons. For a start, investor concerns about the state of the UK housing market have lead to widespread selling of housing stocks across the board. Secondly, Crest confirmed investor fears about the state of the industry when it warned on profits last month.

This is hardly a favourable backdrop for the company, but I don’t think it’s time to give up on the home-builder just yet.

I believe one of the most telling indicators of a company’s prospects is insider dealing (the buying and selling of shares by management). Recently, Crest’s executive chairman forked out £450,000 to buy stock in a business, a significant figure which works out at around 83% of his annual salary. This seems to me to be a tremendous vote of confidence in the business. While it’s no guarantee Crest’s shares will reverse their recent decline, with so much money invested, Crest’s management is incentivised to do whatever it takes to return the business to growth.

With this being the case, I think that now could be an excellent time for risk-tolerant income seekers to follow management and buy into Crest’s dividend income stream. With a yield of more than 9% on offer at time of writing, in my opinion the risk is indeed worth the reward.

Avoid at all costs

On the other hand, one company I would avoid at all costs is The Restaurant Group (LSE: RTN).

After struggling to improve the performance of its legacy businesses, management of this casual dining chain has now decided to launch a takeover offer for the firm behind the Wagamama group of restaurants.

To fund the deal, Restaurant Group’s management has decided a rights issue is the best course of action to raise gross proceeds of approximately £315m. The 13-for-9 rights issue, according to documents published today, will be completed at 108.5p per share, a significant discount to the current share price of 246p.

Execution is the primary risk I see here. Restaurant’s management is trying to buy growth for the business, but group CEO Andy McCue, who joined the company in September 2016, has a mixed record. Despite his best efforts, so far the business has continued to flounder. I’m sceptical that this acquisition will help revive the enterprise’s fortunes.

So for the time being, I’m staying away. I would rather own FTSE 250 income giant Crest Nicholson, which seems to have a more sustainable outlook.

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Want to retire early? These 8%+ FTSE 250 dividend stocks could help you

Rupert Hargreaves — Sun, 26 Aug 2018 07:30:23 +0000

If you want to retire early, it’s vital that your money is working as hard as it can. Unfortunately, with interest rates where they are today, that isn’t possible with regular savings accounts.

So here are three of my favourite FTSE 250 dividend stocks with dividend yields of more than 8% that can help put you on the path to early retirement.

Surging profits

Bovis Homes (LSE: BVS) is on track to have increased EPS three-fold over the latest seven year-period if the company hits City targets for 2018. There’s no reason to suspect that it won’t. Last month the firm told investors that after a better-than-expected first half, it was on track to meet full-year expectations for growth and profit.

The current figures are calling for EPS of 95p, up 32% on last year, putting the shares on a forward P/E of 12. Compared to other housebuilders, this multiple looks a bit on the pricey side, but I believe it is worth paying a premium to buy into this growth story.

I’m even more excited about the company’s dividend potential. Analysts have the firm paying out around 102p per share for the full year, giving a dividend yield of 9%. This distribution won’t be covered entirely by EPS, but with nearly £150m of cash on the balance sheet, Bovis can afford to give a little extra to investors.

Cautious attitude

Bovis isn’t the only builder with a near-double-digit yield. Shares in the company’s peer Crest Nicholson (LSE: CRST) also yield around 9%.

In this case, the distribution looks even more secure. Based on City estimates, Crest’s dividend of 33p for 2018 will be covered twice by EPS of 65p.

The question is, if these payouts are sustainable, then why aren’t more investors buying the shares, thus driving the price up and yield down? I believe this discrepancy is due to the cautious attitude among investors towards the housing market.

Over the past 12 months, cracks have started to show in the UK property market. However, I believe even if prices decline across the UK, demand for new-builds will remain robust. Falling house prices won’t solve the UK’s housing shortage. If anything, it could make it worse as homeowners stay put.

Put simply, I believe both Crest and Bovis can maintain their current dividends for the foreseeable future.

Revenue outlook clear

Kier Group (LSE: KIE) has a more diversified business model than either of the two firms above. The construction company is active in multiple sectors, including infrastructure services and housing.

What I like about Kier is its revenue clarity. In a trading update for the financial year to the end of June, the company reported a construction and services order book of £10bn, guaranteeing approximately 90% of revenue for 2019.

Based on management’s revenue expectations, the City has Kier posting EPS of 116p for 2018, rising to around 132p for 2019. These numbers indicate the stock is trading at a forward P/E of 8 — another worrying low valuation multiple.

It seems the market has awarded Kier this valuation due to uncertainties surrounding the outlook for the construction industry. With 90% of revenue already booked for 2019, these concerns appear overblown. With a dividend yield of 7.5% on offer as well, this could be your chance to snap up the shares at a knock-down price.

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Can you afford to overlook these two FTSE 250 dividend stocks?

Rupert Hargreaves — Tue, 26 Jun 2018 09:35:50 +0000

As my Foolish colleague Peter Stephens recently pointed out, the FTSE 250 is usually viewed as a growth index. And for a good reason, the FTSE 250 has generated capital growth of around 8% per annum for the past decade. Nearly three times higher than the capital return of the UK’s leading blue-chip index, the FTSE 100.

However, while the FTSE 250 as a whole is best known for its capital growth credentials, some of its constituents offer handsome dividend yields.

Market recovery

Oil services company Petrofac (LSE: PFC) has suffered the perfect storm over the past five years. An investigation into its business practices by the Serious Fraud Office, coupled with the falling oil price, sent the shares into freefall towards the end of 2014.

But now the group’s outlook is starting to recover. Despite all of its problems, Petrofac has continued to win contracts from customers. Revenues have remained relatively stable, rising from $6.3bn in 2013 to $6.4bn. Although for the past three years, the business has reported a loss, which unfortunately forced management to slash Petrofac’s dividend by 80% last year.

Nonetheless, orders keep coming from customers. Today the firm announced that it has inked $1.2bn worth of deals in the first half of 2018 and has $20bn of bid opportunities up for award in the second half.

As it continues to win customers, it’s no surprise City analysts are expecting a modest recovery in earnings this year. After losing $29m last year, analysts have pencilled in a net profit of $285m for 2018, equivalent to 63p per share. They believe this higher level of income will give management headroom to increase the dividend 200% to $0.38 per share (29p) for a projected dividend yield of 5.4%.

What’s more, according to these estimates, the shares currently trade on just 8.5 times forecast earnings, a discount of 46% to the broader market according to my calculations. In my view, this is too cheap to ignore.

Cash cow

One other high-yield FTSE 250 dividend stock I’ve got my eye on right now is Crest Nicholson Holdings (LSE: CRST).

Crest’s shares have a very high yield at present. Last year, the company paid shareholders 33p per share in dividends, which means that the trailing yield is currently a massive 8.3%. For some comparison, the average dividend yield of all public stocks in the UK is just over 3%.

If income is your goal, I believe Crest certainly deserves a place in your portfolio. Analysts estimate the company will repeat last year’s 33p per share distribution in 2018. So it looks as if the 8.3% dividend yield is here to stay. Also, the stock is currently changing hands for just 6.2 times forward earnings, making it not only one of the best income stocks around, but one of the cheapest stocks on the UK market as well.

The company’s management certainly hasn’t wasted any time taking advantage of this opportunity. So far this year, insiders have splashed out £150,000 snapping up shares in the homebuilder to take advantage of market weakness. This is the most substantial buying activity for several years, and I believe it could be worth following.

Given that the stock trades on a forward P/E of just 6.2 and yields more than double the market average, I believe the risk/reward profile is highly attractive.

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Is this Neil Woodford 7.5% yielding dividend stock a ‘buy’?

Rupert Hargreaves — Mon, 19 Feb 2018 11:00:07 +0000

Neil Woodford is well known for taking large stakes in his favourite stocks and the latest company to join this club is homebuilder Crest Nicholson (LSE: CRST).

Woodford has owned a stake in this company since last April after he reportedly “identified an opportunity in the sector for income investors.” It would appear that he is still highly confident on the outlook for the industry, having increased his bet on the business from 5.21% to 10.34% at the beginning of last week. This significant position now means Woodford Investment Management is the firm’s largest shareholder.

Neil Woodford has faced plenty of flack recently following some major setbacks in his portfolio. The implosion of subprime lender Provident Financial and the slip-up at outsourcer Capita have dented his reputation as one of the UK’s best stock pickers. However, I believe his investment in Crest might be worth a second look for investors seeking a cheap income play.

Betting on income

Crest has a strong balance sheet, wide profit margins and is a relatively stable business, unlike almost all of Woodford’s failures. For example, at the end of 2017, the company had a net cash balance of £37m and reported an operating profit margin for the year of 20.3%. In comparison, both Provident and Capita were highly leveraged businesses with tight profit margins, which left little room for manoeuvre when the unexpected happened.

As well as an impressive financial profile, shares in Crest are also incredibly cheap. At the time of writing the stock trades at a forward P/E of just 6.5 and supports a dividend yield of 7.8%. Usually, such a cheap valuation is a sign that the market does not believe that the company has much of a future, and investors should stay away, but it does not look as if this is the case with Crest. Indeed, City analysts are expecting earnings per share to grow around 25% over the next two years as the firm continues to benefit from robust demand for housing in the UK.

Even if home sales start to contract, the business should be able to weather the storm. As mentioned above, Crest has a cash-rich balance sheet, which should allow it to survive any downturn. At the same time, management should be able to cut costs relatively quickly if the market starts to cool due to the nature of the building business.

A top dividend play

The market’s best income stocks tend to have two key traits, strong balance sheets and wide margins, and Crest ticks both of these boxes.

Even though it is impossible to tell what the future has in store for the UK housing market, it is clear that as long as there remains a demand for new homes, Crest should be able to profit from this and management will return the majority of this income to shareholders. With this being the case, I believe Crest could be a great addition to your income portfolio. The low valuation and high single-digit dividend yield more than make up for the uncertainty surrounding the broader housing market.

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2 undervalued dividend champions

Rupert Hargreaves — Thu, 28 Sep 2017 11:35:00 +0000

Following a rocky year, shares in CMC Markets (LSE: CMCX) are rising today after the company issued a robust first-half trading update.

Indeed, according to the update, profitability in the first half is “significantly higher than the same period in 2017 with both net operating income and revenue per client higher.” This comes despite a “small decline in active clients,” which “reaffirms the firm’s continuing focus on high-value, experienced clients.“

However, while the company has made a good start to the year, regulation remains a key focus for the business and “despite profitability in H1 2018 being significantly higher than the same period in 2017, the firm remains cautious about the future outlook given the ongoing regulatory uncertainty.“

CMC is concerned about regulators’ desire to crack down on the use of CFD products by inexperienced investors. The company is one of the biggest CFD providers in the UK, so it has a lot at stake here.

Still, I believe that despite the concerns, CMC continues to look attractive as an investment.

Impressive dividend yield

City analysts are only forecasting a 9% decline in earnings per share for the year ending 31 March 2018, followed by a decrease of 3% for the following fiscal year as CMC’s exposure to high net wealth clients should provide some insulation.

With this being the case, after the recent declines, shares in the financial services firm look undervalued today. Specifically, the shares trade at an EV to EBITDA ratio of 6.9, compared to the financial services industry median of 11.6 and a forward P/E of 12.5, compared to the industry median of 15.

On top of this, CMC also offers a market-beating dividend yield of 5.1%, and the payout is covered 1.5 times by earnings per share.

Best buy in the sector?

CMC isn’t the only dividend champion that I believe is worth buying today. Homebuilder Crest Nicholson Holdings (LSE: CRST) has established itself as one of the UK market’s top income stocks during the past few years and right now, the shares look too cheap to pass up.

At the time of writing, shares in the homebuilder are trading at a forward P/E of 7.7. Earnings per share growth of 9% is projected for the fiscal year ending 31 October, followed by growth of 12% for the following period. Based on these estimates, the shares are trading at a 2018 P/E of 6.8.

The company pays out around half of its earnings to investors via dividends, which implies that shareholders a set to receive a yield of 7.6% next year.

Crest’s shares seem to have come under pressure due to the general concerns about the state of the UK housing market. After years of growth, some analysts are now worried that the market is overstretched. The entire sector trades at a low valuation for this reason, but few stocks are as cheap as Crest. For example, Bovis Homes, Barratt Developments and Taylor Wimpey trade at forward P/Es of 12.6, 9.3 and 9.3 respectively, on average 35% higher than Crest’s valuation.

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