If you want to inject fast-paced growth stocks into your portfolio, they have been delivering it in style. I’d only buy one of them, though.

Space heads

IWG (LSE: IWG), formerly called Regus, provides serviced offices, virtual offices, meeting rooms, and videoconferencing to clients. It’s a leader in what it calls the “workspace revolution” and helps more than 2.5m people and their businesses worldwide.

This morning it published its first-quarter trading statement, headlined “strong growth trend continues”, with group revenue up 10.6% to £658.3m at constant currency over the last year. First-quarter revenues were particularly strong, up 15.1% at constant currency.

Selling Japanese

IWG added 55 new locations to its global network, a net growth capital investment of £43.3m, taking the total to 3,311. This was largely due to growth in the Americas, Asia-Pacific, France, Germany and Spain, while revenues declined slightly in the UK, due to the annualised impact of network rationalisation.

The £3bn group’s net debt is £534.1m after net growth investment of £43.3m, although that will shrink after it receives £320m from a recent Japan divestment.

IWG is looking to expand by signing strategic partnerships, and says it has a good future pipeline. Today’s results were in line with expectations, but the stock has clicked up just 0.12%. Perhaps markets were hoping for more, to justify its recent share price surge.

Growth hopes

Given recent growth, I wasn’t surprised to see the stock trading at a pricey 29.1 times earnings. However, this is forecast to fall to just 18.1% this year as earnings have continued to grow strongly, and 16.3% in 2020. By then the yield should be 3%. So you are getting rising income as well as growth.

IWG has been volatile in the past, issuing a profit warning in 2017, which it blamed on weakness in London and natural disasters in overseas markets. Despite that, it still looks like a big potential growth story, as it has a massive potential market to aim at.

Bumpy ride

Fellow FTSE 250 member Inmarsat (LSE: ISAT) describes itself as “the world’s only provider of satellite connectivity to the whole aircraft”, offering both in-flight connectivity for passengers and advanced operational safety systems in the cockpit.

Its share price is certainly flying, although again, after a hugely turbulent spell. The former stock market darling ended 2015 at 1,140p, only to crash as low as 340p, as earnings slid and profits halved. As if that wasn’t enough, net debt climbed from $1.9bn to $2.18bn over the same period.

Over and out

Today, Inmarsat reported a tiny uptick in first-quarter group revenues, up 0.4% to £346.9m, although growth was stronger in its Government and Aviation segments. CEO Rupert Pearce praised a strong underlying performance and positive momentum. However, EBITDA fell 12.9% to $152.4m.

These figures don’t excite and the share price growth has been driven by a $3.4bn takeover bid from Canadian private equity company Triton Bidco. This is due to complete in Q4 subject to shareholder and regulatory approval, and despite market noise about competing bids, I wouldn’t buy it now. I’d take a good close look at IWG, though.

The post These 2 FTSE 250 stocks are smashing the market but I’d only buy one of them appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares 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.

Why I’d buy this 6% yield

ITV’s latest results were given a cautious reception by the market. The shares fell slightly on the day but have since recovered, trading up by about 6% so far in 2019. In my view, the firm’s results reflect the changing nature of its business, as it shifts from advertising-funded television to online subscription services.

The need for this change is clear. In 2018, viewing of ITV’s conventional television channels rose by 1%. Online viewing rose 32%. To address this changing landscape, it’s teaming up with the BBC to launch BritBox, a new online streaming service.

The two broadcasters hope that their huge library of popular British drama will prove a draw for paying customers in the UK and overseas.

The numbers look good to me

Investors’ big fear is that advertising revenue will fall too fast for the ITV Studios programme-making business to make up the shortfall.

The success of BritBox remains to be seen, but personally I think ITV is already making good progress at diversifying its income.

In 2018, ad sales rose just 1%, but revenue from the Studios production business rose by 6% to £1,670m. The business now generates 50% of ITV’s revenue, and more than 30% of its profit.

Despite the growth of online streaming services, the broadcaster also remains very popular, with a 23% share of UK television viewing.

Last month’s figures didn’t flag up any major concerns for me. The group’s operating margin edged higher to almost 19% in 2018 and the 6% dividend yield remains covered by earnings and free cash flow.

With the shares trading on less than 10 times forecast earnings, I think the stock looks too cheap for such a profitable business.

I’m avoiding this flyer

The satellites owned by communications provider Inmarsat (LSE: ISAT) fly high above us. But they face tough competition and the group’s profits have fallen 63% over the last five years.

Unfortunately, heavy spending on new satellites means that Inmarsat’s borrowings have been rising. Net debt has risen from $1,900m in 2014 to $2,176m today. That’s now 17 times the company’s after-tax profits, up from 5.5 times in 2014.

What’s even worse is that broker forecasts indicate that Inmarsat’s earnings are expected to fall by a further 46% in 2019, from $0.32 to $0.17 per share.

The company’s return on capital employed, a measure of profit compared to money invested in the business, has fallen from 12% in 2014 to just 6.9% in 2018. That’s barely any higher than the 5.7% paid by the firm on its borrowings last year. In my view, the company is running to stand still at the moment.

I expect things to get worse

Chief executive Rupert Pearce has already cut the dividend, but my sums indicate the firm has had to borrow cash to afford even this reduced payout. With profits crumbling, I think the dividend should be suspended altogether.

Spending on new satellite services isn’t expected to slow until 2021. I expect debt to continue rising. In my view, shareholders face the risk of another dividend cut and might even be asked for fresh cash. I’d avoid this stock until profits start to recover.

The post Why I’d avoid this FTSE 250 falling knife and buy the ITV share price appeared first on The Twelfth Magpie.

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Roland Head owns shares of ITV. The Motley Fool UK has recommended ITV. 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.

This business provides satellite internet services to ships, aircraft and remote locations all over the world. Customers include most major shipping lines, airlines, oil and mining firms and governments.

In terms of service provision, Inmarsat is a market leader. But today’s share price fall doesn’t surprise me. Today’s half-year accounts confirm my view that shareholders in the group continue to face significant financial risks.

Sales up, profits down

One highlight of today’s figures was that revenue for the last six months rose by 4.9% to $717.2m, compared to the same period last year. The company said that the majority of this growth came from the aviation sector, where many airlines are adding in-flight internet services to their aircraft.

Unfortunately this increase in sales wasn’t enough to support profits. Earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 1.8% to $373m. The main reason for this appears to be $31.7m of extra spending on “low-margin equipment” to help capture further market share in this sector.

This suggests to me that new airline customers may be driving a hard bargain. There’s more satellite capacity than there used to be, so potential customers can afford to be choosy.

This extra spending also highlights the capital-intensive nature of the firm’s business. Inmarsat must continually invest in new equipment to maintain and improve its services. Capital spending totalled $257.8m during the first half of the year. Although this was lower than during H1 2017, it still accounted for more than one third of revenue.

Debt problems scare me

This is a profitable, market-leading business that provides good services. But in my view it has too much debt.

Net debt rose from $2,078.6m to $2,139.5m during the first half. That represents almost three times the company’s EBITDA from the last 12 months. That’s well above my preferred maximum of two times EBITDA.

The dividend has already been cut by 63%, falling from 54 cents per share in 2016 to a guided level of 20 cents per share for the current year. I think there’s a risk that this payout could be cut again.

Unless market conditions improve, I suspect Inmarsat will need to raise fresh cash by selling new shares at some point over the next few years.

One way around this problem would be for the firm to attract a trade buyer. But a recent move by French firm Eutelsat Communications failed to result in a bid, presumably because the parties couldn’t agree a price.

Not cheap enough for me

Inmarsat’s earnings have been falling steadily. This is expected to continue:

These forecasts put the stock on a 2018 forecast P/E of 19, rising to a P/E of 34 in 2019. Although the 2.9% dividend yield is reasonably attractive, I don’t think the shares are cheap enough to reflect the risks posed by the group’s high debt levels.

I share my colleague Rupert Hargreaves’ view that this stock is one to avoid.

I’m buying BT

I’ve been buying shares in telecoms giant BT Group (LSE: BT-A) this year. Although this FTSE 100 firm does face some challenges, I think it could be a good turnaround buy.

July’s first-quarter trading update showed that adjusted pre-tax profit rose by 3% to £816m during the first half. This improvement seems to have been driven by the group’s consumer business, where sales rose by 2% during the period and EBITDA profit rose by 10%.

BT says that this improvement was driven by growth in sales of expensive smartphones, and SIM-only mobile contracts, along with an increase in the number of customers now paying for the BT Sport television service. Operating costs stayed flat during the period, allowing the increase in revenue to flow straight through to profits.

A turnaround with legs?

Chief executive Gavin Patterson will be leaving the building later this year. Chairman Jan du Plessis took soundings from shareholders and decided that “a change of leadership” was needed to deliver Mr Patterson’s turnaround strategy.

I can’t help but agree. My view is that the CEO has been too distracted by BT Sport and has been slow to protect the group’s operating margin, which has fallen from 17.8% in 2014 to 13.3% last year. The company so far failed to take advantage of its scale, as the owner of the UK’s largest mobile and fixed broadband networks.

The good news is that Mr Patterson’s turnaround strategy should address all of these problems.

The new BT Plus service provides seamless high-speed internet across mobile and fibre broadband connections. And the £800m cost-cutting programme should deliver annual savings of £1.5bn after three years.

Jobs are being cut in some areas and added elsewhere. And the company has now agreed a pension deficit reduction programme that provides visibility on payments until June 2020.

Why I’m buying

These developments are all good news for BT shareholders, in my view. But there were two other factors that swung the decision and persuaded me to buy the shares.

The first was the appointment of City veteran Mr du Plessis as chairman. This South African businessman has an impressive track record of turning around big companies. Most recently he led miner Rio Tinto from 2009 until 2018.

The second factor was that I thought the shares were starting to look too cheap. Even in its present condition, BT is expected to generate normalised free cash flow of between £2.3bn and £2.5bn this year. That values the shares at roughly 10 times free cash flow, which looks tempting to me.

Income investors will probably be tempted by the 6.6% yield that’s currently on offer. Personally I think there’s a good chance this payout will be cut by Mr Patterson’s replacement, to help fund pension payments and debt reduction.

But with the shares trading on just 8.8 times forecast earnings, I still think BT is too cheap to ignore.

The post Why I’d shun this FTSE 250 dividend stock and buy the BT share price appeared first on The Twelfth Magpie.

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Roland Head owns shares of BT and Rio Tinto. 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.

Restructuring

BT has unveiled an ambitious restructuring plan aimed at tackling its high cost base and simplifying its business model. The former phone monopoly is now expected to eliminate 13,000 managerial and administrative jobs in an effort to eventually save £1.5bn a year.

But it’s not just on costs that BT hopes to deliver improvement — it’s also looking towards generating top-line growth and is funding increased investments in its wireless 5G and fibre broadband networks. The new strategy comes after the group’s recent disappointing full-year results showed it taking a 3% drop in fourth-quarter revenues to £5.97bn.

Looking ahead, with CEO Gavin Patterson’s departure later this year, there’s scope for further changes to be made to its strategy and a possible expansion in its restructuring plans. What’s more, there’s also the opportunity to potentially reset relations with top shareholders and the regulator Ofcom, both of which had become strained under Patterson in recent years.

Well-placed

Much of the stock’s long-term investing thesis lies with the group’s consumer-facing business, which has been the primary source of revenue growth for the past couple of years. In this space, BT is well-placed to benefit from the continuing shift towards converged services from a single supplier in the consumer market. The UK is ripe for more converged services, given that such multi-play bundles in the UK account for a smaller share of the market than many European countries.

Although BT’s pay-TV service has struggled, the group is by a wide margin the biggest broadband and wireless telecoms operator, giving it a very significant advantage in terms of scale. It claims to have already achieved £290m in annual cost synergies from its acquisition of EE and will likely have more to gain through rationalising sites and shared fibre investments further down the line.

7.1% yield

The company, still reeling from a disastrous accounting scandal at its Italian business, saw its share price slump to more than a five-year low of 201p in May. The shares have recovered somewhat in recent weeks on its announcement of a new strategy, but valuations for the company remain undemanding.

Shares in BT now trade at just 8.2 times its expected earnings this year, while offering a very tempting dividend yield of 7.1%.

Multiple headwinds

On the downside however, a turnaround for the shares doesn’t seem imminent. The group, which is under growing pressure to invest much more in its fibre infrastructure and to reduce its £11.3bn pension deficit, has only just managed to hold its dividend flat for the next two years, after abandoning plans to grow annual dividends by 10% until 2019.

Meanwhile, its business and public sector services division has been hit by a dearth of new contracts, and competition is hotting up in the sunnier consumer market. Amid the high cost of programming and price cuts from some of its competitors, margins are being squeezed in the retail division.

Brexit has also created other headwinds, as weak consumer confidence could cause would-be customers to reconsider the importance of the kind of high value bundles that BT would like to push, while continuing uncertainty from ongoing UK-EU talks could mean more businesses will hold back new investments for longer.

Is trouble looming?

Elsewhere, shares in the satellite communication business Inmarsat (LSE: ISAT) fell sharply this week on news that rival French group Eutelsat ruled out a bid for it.

The company, which previously rejected a bid approach from US peer EchoStar, is rumoured to be the target of several rival firms amid ongoing consolidation in the satellite communication industry.

Under intense competitive pressures in the market, Inmarsat has been going through a difficult patch as excess capacity in the industry weighs on pricing. The company, which recently cut its dividend by 60%, saw pre-tax profits fall by nearly a quarter to $230m last year.

Looking ahead, it has warned about a “lack of visibility” around future cash payments from Ligado Networks, an important US partner that leases spectrum in North America. The payment uncertainty from Ligado, a company which has had difficulty in obtaining a licence from the Federal Communications Commission, could have a significant impact on Inmarsat’s free cash flows at a time when the company needs to push ahead with big capital investments.

Lucrative airline sector

It is looking to expand in the lucrative commercial airline sector, a market which is booming on fast-growing passenger demand for on-board Wi-Fi internet. The company predicts in-flight broadband will generate $130bn of total revenue for the entire sector by 2035.

Orders from the airline industry are increasing, and revenues from the sector climbed 39% in the first-quarter of 2018. On the downside, it will take some time before growing revenues from this division become a significant source of profits because of high investment costs and aggressive pricing by rivals to capture market share. After all, Inmarsat needs to invest in its next-generation network and establish itself in the market in order to compete.

Near term, there’s not a lot to look forward to. There are few signs that competitive pressures will ease any time soon, while City analysts expect underlying earnings to decline by another 11% this year. Valuations aren’t tempting either — its shares trade at a pricey 21.2 times forecast earnings.

The post Has the BT share price finally turned a corner? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any of the shares 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.

So, in this article, I’m going to take a look at two stocks that I am avoiding at all costs. 

High street struggles

For the past few years WH Smith (LSE: SMWH) has been able to defy the gloom on the high street by investing in its travel business, stores located in destinations such as airports. 

According to its trading update today, for the 13 weeks to 2 June total group sales were up 4% with like-for-like sales up 1% compared to last year, led by an 8% increase in sales at its travel business. Like-for-like high street sales fell 1% for the period.

Understandably, the company is focused on expanding where it’s strongest, and that’s in travel retail. The firm says it’s on target to open between 15 and 20 travel units in the UK throughout the rest of 2018. A further eight units are planned internationally bringing the total number to open internationally to 282.

However, selling sweets and drinks to captive customers in airports is one thing, trying to attract customers into your stores on the high street is something else altogether. And this is where WH Smith seems to be struggling. 

A survey of more than 10,000 consumers by Which? recently declared WH Smith the worst high street retailer in the UK. I’m worried about the impact this might have on the brand. 

I’m also concerned about WH Smith’s valuation. Analysts are only expecting earnings growth of 5% for the 2018 year. But the shares trade at a forward P/E of 18.1, which looks extremely expensive compared to the firm’s growth. 

Overall, even though WH Smith is registering sales growth, the company’s sour reputation with customers and high valuation puts me off the stock.  

Continual disappointment 

Satellite communications company Inmarsat (LSE: ISAT) was once a stock market darling, but the business has struggled to live up to expectations and, as a result, its share price has been crushed. 

The stock has fallen from its all-time high of 1,111p in 2016 to just under 400p today, as earnings slumped. After reporting earnings of $0.72 per share in 2014 — a high point for the group — they’ve since declined to $0.40 for 2017. And analysts are not expecting an upturn anytime soon. A further decline of 14% is pencilled in for this year, followed by a further decrease of 42% to $0.22 for 2019. 

Based on these disastrous forecasts, shares in Inmarsat are trading on a 2019 P/E of 24. To me, this valuation seems nonsensical, especially as earnings will have fallen by two thirds in five years by 2019. In fact, I believe shares in Inmarsat could fall further in the weeks and months ahead, unless it conjures up some growth for 2019. 

The company’s one redeeming feature is its 4.3% dividend yield. Although based on current City numbers, in 2019 the payout of $0.23 won’t be covered by earnings per share. The firm also has a dangerous level of debt. 

All in all, unless Inmarsat can reverse course over the next 12 months, I believe it’s best to avoid the stock. 

The post Two FTSE 250 stocks I’m avoiding at all costs appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended WH Smith. 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.

Shares up, profits down

Shares in satellite communications firm Inmarsat (LSE: ISAT) surged nearly 10% higher when markets opened this morning, after the company issued a solid set of first-quarter results.

Sales in the group’s aviation business rose by 39% to $56m during the quarter, helping to lift group sales by 4.8% to $345.4m.

Inmarsat is a big player in the growing market for in-flight internet access. In June the firm plans to launch the European Aviation Network, which will provide in-flight broadband at household speeds across Europe.

However, despite a strong performance from aviation, falling revenue from high-margin government contracts meant group profits dipped. Earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 4.5% to $174.9m, pushing the EBITDA profit margin down from 55.6% to 50.6%.

What’s gone wrong?

Although Inmarsat is a world-class player in this sector, it’s suffered from growing price competition while having to invest heavily in next-generation services.

Shareholders have seen profits fall and debt levels rise. As a result, the share price has fallen by nearly 65% since hitting 1,110p in December 2015.

I’d fly away from these figures

Today’s first-quarter figures suggest to me that the firm’s problems aren’t yet over. Cash generated from operations fell to $148m during the period. That’s 21% lower than the $187.2m reported for the first quarter of 2017.

This cash inflow wasn’t enough to cover $141m of capital expenditure and $21.5m of interest payments. As a result, the group saw a net cash outflow of $12.5m during the period, nudging net debt up to $2,100.7m. This represents a multiple of 2.9 times EBITDA, which is well above the 2 times to 2.5 times range I view as a prudent maximum.

Consensus forecasts for 2018 put Inmarsat on a forecast P/E of 13 and with a 5% dividend yield. This may sound cheap, but earnings are expected to fall by a further 40% next year. I think another dividend cut may be needed. In my view it’s still too soon to invest.

This could be a safer choice

Cigarette giant British American Tobacco (LSE: BATS) should be a safer choice. The firm’s business is highly profitable and requires very little investment. However, the company does face one problem — global sales keep falling as people stop smoking.

To combat this decline, it has spent heavily on acquisitions and invested in next-generation vaping products. The problem is that the market isn’t yet convinced that next-generation products can ever replace the profits provided by traditional cigarettes. And while acquiring rivals has helped to boost market share, last year’s £41.8bn acquisition of Reynolds American has resulted in net debt of £46bn.

Although this level of borrowing is higher than I’m comfortable with, I believe the firm will probably be able to gradually reduce debt over time. I don’t see any immediate threat to the dividend.

Analysts expect adjusted earnings per share to rise by 6% this year. With the shares trading on a forecast P/E of 13 and offering a forecast dividend yield of 5.2%, I’d rate British American Tobacco as a possible income buy.

The post This FTSE 250 5% yielder isn’t the first stock I’d buy after today’s news appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares 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.

But with a hearty 5.5% dividend yield still on offer, an underlying business that is still profitable, and solid growth opportunities, should contrarian investors take a chance on Inmarsat?

I would urge caution. On one hand, the group still makes a fairly compelling investment case as its revenue is growing, up 5.4% last year to $1,400m. And its largest segment, maritime solutions, may finally be turning a corner with Q4 sales returning to year-on-year growth. Furthermore, over the medium term its pan-European satellite broadband solutions for aircraft is a potential goldmine if air passengers fork over gobs of cash to stay connected during their flights.

However, there are also plenty of red flags. For one, margins are compressing as management ups investment in the aviation division in anticipation of future growth. Of course, this could work out wonderfully, but competitors have launched a lawsuit against the tender that awarded Inmarsat this contract, it’s far from clear whether future demand will ever meet lofty expectations, and the cash-intensive nature of this division means it needed to cut cash outflows elsewhere to pay for it, which led to the dividend cut.

Then there is the group’s high and rising net debt, which increased to $2,078m at year-end as net cash flows turned negative to the tune of $166m. This net debt is still only 2.8 times EBITDA, but with profits moving backwards and cash outflows increasing, Inmarsat had better hope its big bet on European in-flight WiFi pays off. This may yet turn out to be the case, but with plenty of red flags and a non-bargain valuation of 14 times forward earnings, I’m giving Inmarsat a wide berth for now.

Can management turns these rags into riches? 

A more interesting high-yield option for contrarians may be newspaper publisher Trinity Mirror (LSE: TNI). The group currently offers investors a massive 7% dividend yield that is covered nearly four times by earnings.

Of course, there is the minor problem of print newspaper readership stuck in terminal decline. And Trinity Mirror hasn’t been, and probably never will, be able to solve that one.

That said, management has found a way to keep its papers highly profitable even as revenue careens downwards. And the key is snapping up other newspapers and ruthlessly cutting costs, which boosted operating margins to a respectable 20% last year.

Its most recent deal was the £127m purchase of the owner of the Daily Express. Management expects it can slash operating costs at the newly acquired papers by some £20m a year, which in addition to the £35m in EBITDA they already generate, could make the deal another great one.

These sorts of deals won’t stop revenue falling as advertisers continue to move online, but if management can figure out how to monetise its market-leading 33.4m unique monthly online visitors, it could actually return to growth as newspaper revenue shrinks. There’s still a long way to go, but for investors who believe Trinity Mirror’s high-grade management team can pull off another coup, its shares could be a bargain at under 3 times forward earnings.

The post One 7%+ dividend yield I love and one high-yield falling knife I’d avoid appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any of the shares 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.

The launch of high-bandwidth satellites in recent years has brought more capacity online than ever, but demand has not kept up with its pace due to external headwinds, which include an under pressure maritime environment and weakness in business aviation

Amid these concerns, investors have become increasingly concerned that its dividend could be jeopardised. Dividend cover, a simple gauge of safety which is calculated by simply dividing the company’s net income by the amount of dividends paid to shareholders, was only 1.2 times for the company last year.

Looking ahead, cover could fall below 1 times in the coming years as competition continues to hurt margins. This would mean the company would have to borrow money or sell assets to maintain the payout, which may become difficult as the group’s costly capital spending plans and its indebted balance sheet would eat into free cash flows at a time when profits are shrinking.

Better-than-expected revenues

The company today reported a better-than-expected 4.8% increase in its third quarter revenues, allowing Inmarsat to deliver faster growth than many of its competitors. This was mostly down to a 50.1% jump in revenue from its aviation unit, which reflected an increase in the number of installed aircraft and higher customer airtime usage.

Despite the impressive revenue figures, the group’s EBITDA was 6.5% lower, at $191m, reflecting the prioritisation of revenue growth over margins. Additionally, management narrowed expectations for full-year profit to a range of between $1.23bn and $1.28bn, from $1.2bn to $1.3bn.

Looking ahead, CEO Rupert Pearce said that although “markets remain challenging and the outlook continues to be difficult to predict”, he continues to be “confident” about the longer-term prospects.

But judging by the share price reaction today, investors don’t seem convinced. Although Inmarsat shares initially rose as much as 6% on the revenue beat in early trading, they’ve since fallen to an 8% decline by mid-afternoon.

Uncertain outlook

Elsewhere, transport group Stagecoach (LSE: SGC) is warning of an uncertain outlook as lower fuel prices and recent terror attacks hit demand for bus and rail services. The company is also in talks with the government over its contract to operate the East Coast Main Line after exceptional charges linked to the troubled franchise saw profits at the company tumble last year.

Looking ahead, its outlook may be less bleak. Although passenger numbers aren’t expected to rebound any time soon, the longer-term fundamentals for public transport remain intact. Factors ranging from population growth, increasing urbanisation, congestion and trends in government policy suggest the recent weakness in passenger demand is just a setback in the longer-term structural growth story.

And in the short run, Stagecoach is not rudderless — it is in a stronger position than its rivals to raise prices on its UK bus services as it has lower average bus fares than its competitors. Some relief may also come from its negotiation of its East Coast contract following delays caused by infrastructure work, which could also lift earnings in the medium term.

As such, I reckon Stagecoach is a better high-yield play. Although its dividends are far from guaranteed, the company seems to me in a better position than Inmarsat to sustain dividend payouts at current levels.

The post Should you be tempted by these high-yield stocks? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. 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.

Trinity had previously been considering purchasing a stake in Express Newspapers. But I believe the prospect of owning the Express outright paints a very different picture for investors.

A special situation buy?

There’s not much doubt that printed newspapers and print advertising are in decline. Trinity Mirror’s revenue is expected to fall from £713m to £626m in 2017, and then to £592m in 2018.

And yet this remains a very profitable business. The shares offer a 6.2% yield that’s covered comfortably by free cash flow. Net debt is pretty insignificant, and although the group’s pension deficit is a concern, I don’t think it’s a deal breaker.

One remarkable point is that the group’s stock trades on a P/E of 3. My reading of this ultra-low rating is that investors are determined to extract as much as from the business as possible (through the high yield) before it goes bust.

Is this too pessimistic?

Combining the Mirror and Express newspapers into one group could generate some attractive cost savings. I suspect that both journalism and printing costs would be cut, while a larger combined readership could attract higher advertising rates.

Although we don’t know much about the profitability of the Express, Trinity boss Simon Fox presumably believes he could make a profit from the newspaper.

I believe there’s a chance that a combined business could generate a lot of cash for shareholders for a period of time. The question is how long that period would be. Could the business adapt to a profitable long-term model?

These are difficult questions, and I don’t know the answers. But I think there’s a chance that buying Trinity Mirror shares today could be a very profitable decision.

How safe is this 6.6% yield?

Satellite internet provider Inmarsat (LSE: ISAT) was one of the pioneers in this industry. Setup in 1979 to provide telephone services for ships at sea, it’s grown into a £3bn company which provides satellite broadband to ships, airlines and many other organisations.

Unfortunately this growth has come at a price. Investing in the latest generation of satellites has been costly, leaving the group with net debt of $2bn. At the same time, market conditions have softened in some sectors.

Analysts have responded by cutting their 2017 earnings forecasts for the firm from $0.57 per share one year ago to $0.43 per share today. This has left the group’s forecast dividend of $0.57 uncovered by earnings, but offering a prospective yield of 6.6%.

A recovery buy?

In my view, Inmarsat is a market-leading business that’s deeply embedded in several key markets. It’s also still a very profitable business, with an operating margin of about 30%.

Earnings are expected to rise by 19% in 2018. I’m confident this business will recover and remain successful. So buying today could be a contrarian opportunity.

However, the group’s $2bn debt burden and uncovered dividend look uncomfortable to me. I don’t think the shares are cheap enough yet to reflect the pressure on the firm’s balance sheet and the risk of a dividend cut.

The post Two 6%+ yielders that could have a major impact on your investment performance appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares 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.

It provides testing and performance analysis technology to the communications industry, and that’s a profitable business. And though earnings have been erratic over the past few years, the dividend has been growing steadily.

The share price shed 4.5% on Thursday morning, despite first-half adjusted operating profit climbing by 67% to $17.4m and adjusted EPS putting on 86%.

Perhaps unchanged revenue figures or the interim dividend being pegged at 1.68 cents caused some disappointment, but I’m very encouraged to see free cash flow more than doubling to $28.7m.

Although the exit of some non-core product lines, plus delays in Ethernet testing, mean that revenue should be flat, full-year profit expectations remain unchanged, according to chief executive Eric Hutchinson.

Solid growth

That suggests the analysts’ consensus for a 29% rise in earnings for 2017 is on the ball, with a further 15% currently suggested for 2018. The share price has climbed over the past year, to 116p, giving us a forward P/E of 22 (dropping to 19 for 2018), and there’s been some boost based on takeover rumours.

But with growth set to continue (and a PEG of a modest 0.8), I see that as a decent valuation for a growth share. But more to the point, I think above-inflation dividend rises should take the currently-expected 2.5% yield to something very attractive in the coming years.

With cover by earnings set to grow even faster, and Spirent throwing off lots of cash, I really do see a future dividend star in the making here.

Under pressure

I wish I could say the same for Inmarsat (LSE: ISAT), but my confidence in the satellite communications firm’s dividend is waning.

We’re looking at mooted yields of better than 5.5% this year and next, but the pressure is building as EPS is expected to drop by 30% leaving dividend cash badly uncovered — and even an 18% EPS recovery indicated for 2018 would still leave cover at only 90%.

Though first-half revenue rose by 9.4%, largely due to contracts with various governments, adjusted profit after tax dropped by 10.3%. And the share price dropped by 3.3% to 762p in early trading as a result.

I am convinced that Inmarsat has a healthy long-term future, being one of the world leaders in its field (and with very high barrier to entry — satellites don’t come cheap), but the medium term looks like it could be erratic.

Volatility to come?

The firm said that “whilst we have delivered a robust performance in recent quarters, our markets remain challenging and the outlook continues to be difficult to predict,” and there are uncertainties over shorter-term government business.

Inmarsat did raise its interim dividend by 5% to 21.62 cents per share which would suggest confidence in its viability, and a scrip scheme introduced in 2016 should take some pressure off the demand for cash. 

But at this stage, with a forward P/E of 22 while earnings are expected to fall, I just see this as a risky bet for those looking for reliable progressive dividends — and Inmarsat is not a buy for me right now.

The post One dividend star I’d buy today, and one I’d sell appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Alan Oscroft has no position in any shares 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.