Could it be argued though, that now is actually a great time to plough into McColl’s again? Some would see its forward P/E ratio of 8.8 times as low enough to reflect any more trading turbulence that might well come its way. Income hunters may see its jumbo 5.7% corresponding dividend yield as a reason to pile in too.

Reasons to be cheerful

But there’s no sugar coating it. Sales at the convenience store giant have been in the doldrums in recent years because of those aforementioned structural and cyclical problems, not to mention the collapse of supplier Palmer & Harvey two years ago.

Glass-half-full investors would suggest the business may be showing green shoots of recovery — like-for-like sales grew of 1.2% in the first 11 weeks of the fiscal year beginning December 2018, improving from flat growth in the prior quarter. McColl’s seems to be coming through the gloom created by the aforementioned collapse of its rival, while steps to improve key product lines, such as fresh food, also appear to be paying off.

What’s got many in the market quite excited is the steps the grocery play is making to boost its relationship with industry colossus Morrisons. Since the latter became the supply partner in 2017, the tie-up has steadily evolved, with McColl’s becoming exclusive stockist of the FTSE 100 firm’s Safeway-branded products.

And, more recently, McColl’s rebranded 10 of its stores under the Morrisons Daily fascia, a move which analysts at Peel Hunt said could make “a major difference” to the top line. Indeed, the broker suggested the decision to sell Morrisons-labelled products under the company’s branding could be “gold dust” to its smaller rival and prompt an extension of the programme to other stores in its estate.

Fresh financials coming up

Sceptics would argue Peel Hunt may be overestimating the possible impact of the tie-up in the wider scheme of things. It’s true the convenience segment continues to grow ahead of the broader grocery market, but the country’s Big Four operators still expanding their own operations here too. Just this month, Tesco announced plans to introduce upmarket stores stocking its Finest premium ranges.

Allied with the threat posed by the growth of the online and discount segments, McColl’s has a hell of a fight to keep its recent sales recovery rolling, in my opinion.

Now half-year financials are set to be released on July 23, but I’m still content to avoid the business. I’m not just fearful over the competitive pressures on McColl’s long-term profits outlook. I’m also concerned about how the rising pressure on consumer confidence will be reflected in that upcoming release. And for this reason, I think the retailer is in danger of resuming its shocking share price downtrend.

So ignore those big yields and low earnings multiples, I say. Instead, go shopping elsewhere for chubby dividends.

The post Red alert! Will this unloved 6% yield surge or sink in July? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended McColl's Retail and Tesco. 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.

Down 75% over the past year alone, the convenience store operator has suffered because of intense competition, broader pressure on UK consumers’ shopping power, and supply chain problems related to the collapse of wholesaler Palmer & Harvey’s in late 2017.

Surprisingly, though, investor appetite for McColl’s perked up following full-year results released last week. In this release the retailer disclosed that, although like-for-like sales had slid 1.4% in the 12 months to November, its top line had made some positive progress as the year progressed, resulting in flat like-for-like sales in the final quarter.

And promisingly it was advised that underlying sales had actually perked up in the first three months of the new fiscal year, up 1.2% to be exact.

In recovery?

So is now the time to pile in, then? Not by a long chalk, in my opinion. Sure, City analysts may be predicting an 18% profits bounceback in fiscal 2019, aided by the completed implementation of Morrisons as its supplier in 1,300-odd of its stores. I fear, though, that increasing competition in the British grocery sector and the subsequent price wars threaten to blow this forecast way off course.

Not even its cheap share price, as illustrated by its rock-bottom forward P/E ratio of 7.2 times, is enough to tempt me to invest. Chief executive Jonathan Miller claimed last month that “in approaching 30 years in the business I have never known a year as challenging as 2018.” Those wholesaler issues may be consigned to history but there are still plenty of fearsome obstacles that McColl’s must overcome to return to earnings growth.

The convenience store segment, like online, is a rare bright light for Britain’s so-called Big Four supermarkets as sales in their traditional megastores have slumped. With sales here still growing it’s unlikely that the likes of Tesco and Sainsbury’s will dial back their assault on the sector.

Other risks

Rising competition from the country’s traditional grocery heavyweights is not the only cause for concern, though, as Amazon prepares to launch its own convenience proposition on these shores. According to media reports, the US internet giant has snapped up retail space in Central London in order to roll out its Amazon Go cashierless stores. 

McColl’s is also likely to suffer indirectly from the electric expansion plans of Aldi and Lidl, and particularly so as the tough economic environment encourages more and more cash-strapped shoppers into the arms of the discounters.

In a reflection of last year’s trading troubles McColl’s chopped the dividend back from 10.3p per share in the previous year to 4p, and City analysts are expecting a similar full-year reward to fiscal 2019 for the current period. Those increasingly tough trading conditions concern me, though, and therefore I’m wary of additional dividend cuts. For this reason I’m happy to avoid the company, despite its 7% forward yield, and invest my hard-earned investment cash elsewhere.

The post Is this hated 7% dividend stock a brilliant buy or an investment trap? appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended McColl's Retail and Tesco. 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.

One is a company I’ve previously owned shares in, but am now avoiding. The other is a business that I believe could help you to build a market-beating pension pot and retire early.

Good news or bad?

Shares in convenience store operator McColl’s Retail Group (LSE: MCLS) fell by more than 10% in early trading on Monday. Investors appeared to be disappointed with the firm’s half-year results, which showed a further 2.7% fall in like-for-like sales for the six months to 27 May.

One of the reasons for this decline is the failure of wholesaler Palmer & Harvey last November. P&H supplied 700 of the group’s 1,300 stores, so its sudden closure caused a lot of disruption. The transition to receiving wholesale supplies from Morrisons is only just being completed.

A second challenge facing the group is the integration of 300 Co-Op convenience stores, which it acquired last year.

The combined effect of these pushed the group’s adjusted earnings before interest, tax, depreciation and amortisation down by 3% to £16m during the first half of the year. Adjusted EBITDA for the full year is now expected to be similar to last year, despite an expected 10% increase in total sales.

It’s hard not to be a little disappointed by these results. Although they do reflect one-off challenges that are unlikely to repeat, I think they also highlight some of the risks for investors in this business.

What could go wrong?

In today’s half-year results, the company said that as it heads into 2019, “it will remain important to manage intense cost pressures in the business, whilst also investing in the customer offer to maintain our competitive position.”

In other words, McColl’s management expecst to continue facing tough competition on prices from supermarket rivals.

As you’d expect, this is already a business with pretty slim profit margins. The group generated an operating margin of 2.2% last year. During the first half of this year, that figure fell to 1.1%, or 1.6% if you exclude costs the company says are one-offs.

These low margins wouldn’t worry me so much if the group was able to generate a high return on capital employed (ROCE). This ratio measures profits compared to the capital invested in the business.

However, McColl’s ROCE has fallen from 12.8% in 2015 to 7.3% last year. Today’s half-year figures show that the group’s trailing 12-month ROCE has been maintained at 7.4%, so at least the decline has been arrested.

However, net debt is still relatively high at £112m — almost unchanged from the same point last year. The company says that this is lower than expected, as it’s secured “improved supplier terms” from its new wholesaler Morrisons. Essentially, this means that McColl’s has been able to agree longer payment terms with its new wholesaler. When a retailer does this, it generates a one-off cash windfall.

Even with these gains, net debt equates to about 2.5 times forecast EBITDA for the year. I prefer to see this multiple below 2 times, especially for low-margin businesses that are vulnerable to aggressive competition. My concern is that McColl’s won’t find it very easy to repay the debt it used to fund the acquisition of the Co-Op stores.

Buy, sell or hold?

I estimate that McColl’s shares trade on about 10 times forecast earnings after today’s fall. The interim dividend has been left unchanged at 3.4p per share. Based on last year’s dividend, the stock now offers a yield of 5.6%.

This may seem cheap, but I believe the group’s low margins and substantial debt mean that the risks to shareholders are growing. The shares look fully-priced to me, and I think there are better options elsewhere in the food and drink market.

A market-beating star

The problem for McColl’s is that customers only use its stores if they are cheap and located in the right place. If there’s a rival store nearby with lower prices, customers will go there instead.

Customers don’t really feel much brand loyalty. This makes it hard to protect profit margins. For my second stock, the situation is quite different. Soft drinks producer Nichols (LSE: NICL) makes a number of branded drinks, such as Vimto, Sunkist and Levi Roots. These all have loyal customer followings in the UK and a number of overseas markets.

Nichols’ customers appear to prefer these branded drinks to cheaper rivals. The company generated an operating profit margin of 20.1% during the first half of this year. Return on capital employed was 21.7%, highlighting how profitable this business really is.

Why this matters

Nichols’ high returns mean that it generates a lot of cash. The company had net cash of £37.1m and no debt at the end of June. This enables management to fund investment in new products or pay dividends without borrowing money. So there’s very little risk that the company will run short of cash or experience financial difficulties. Funding everything from net cash also tends to make it easier for a profitable company to beat the market, as equity returns aren’t diluted by higher levels of debt.

Nichols is a good example of this. Despite concerns about the impact of the sugar tax, the firm’s shares have risen by 40% over the last five years. This compares to just 15% for the FTSE 100.

So £10,000 invested in the Vimto-maker in July 2013 would be worth about £14,000 today. In contrast, a £10,000 investment in a FTSE 100 tracker would only be worth around £11,500 today.

A long-term buy

Nichols’ stock doesn’t look cheap. Shares in the soft drinks firm currently trade on a 2018 forecast P/E of about 21, with a prospective yield of 2.4%.

However, I think the risk of a dividend cut or share price collapse is much lower that at McColl’s. I believe that the soft drink firm’s valuable brands, high profit margins and strong balance sheet simply make it better quality business.

In my view, Nichols’ market-beating performance is likely to continue. So I’d be happy to buy the stock at current levels for a long-term portfolio.

The post This dividend growth stock could crush the FTSE 100 and help you quit your job 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 recommended McColl's Retail and Nichols. 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.

Troubles in both its core British and French territories has caused me to retain a cautious perspective on FTSE 100 giant Kingfisher (LSE: KGF) for what now seems like an age.

But the DIY colossus is not the only retail play I have long warned investors against ploughing their hard-earned cash into.

Indeed, I’m not surprised to see investor sentiment towards McColl’s Retail Group (LSE: MCLS) sour a little further in start-of-week business. I last warned share pickers against splashing the cash on the company back in December on the back of deteriorating trading conditions.

The convenience store giant was last dealing 5% lower in Monday’s session, continuing its recent downtrend and meaning that price levels not seen since last July are now being revisited.

Last time I covered McColl’s, I noted that retail sales growth on a like-for-like basis registered at just 0.1% during the 12 months ending November 2017. But turnover has deteriorated even further since then — on a comparable basis it dropped 2.2% in the 11 weeks to February 11.

Problem sector?

The convenience segment is, along with the online marketplace, one of the bright sparks for Britain’s beleaguered grocers.

However, this does not make McColl’s immune to the wider pressures created by intensifying competition as the Big Four supermarkets build up their own network of convenience supermarkets, nor the broad revenues problems caused by faltering shoppers’ spending power.

To make matters worse, McColl’s has additionally been smacked by the demise of wholesaler Palmer & Harvey (P&H) at the back-end of autumn. While the business inked supply deals with Nisa and Morrisons to minimise the consequent disruption for its newsagents and stores, like-for-like sales at outlets previously supplied by P&H still dropped 3.6% in the period.

This was much, much worse than expected and is likely to see predictions of a 19% earnings rise in fiscal 2018, propped up by McColls’s expansion drive, fall by the wayside. And as I say, with the fragmentation in the supermarket sector still intensifying, the anticipated 17% profits improvement for next year could also see the axe.

A low forward P/E ratio of 10.9 times reflects the possibility of such downgrades now and in the future, and would therefore not be enough to encourage me to invest. And nor would vast dividend yields of 4.6% and 4.8% for this year and next.

Another scary dividend selection

As I previously said, increasingly-challenging market conditions would also encourage me to switch out of Kingfisher without delay.

Yet like McColl’s, it could also be considered an attractive destination for income chasers, what with dividends expected to tear higher. The City’s predicted 10.6p per share dividend for the year concluding January 2018 is expected to rise to 11.7p this year and again to 13.7p in fiscal 2020. Thus yields skip from 3.2% in the present period to an inflation-busting 3.8% next year.

But these projections are underpinned by expectations that earnings will rise 12% and 16% in fiscal 2019 and 2020 respectively, a hard task in the current climate as disruption created by its transformation plan continues, and the wider home improvement market struggles. The B&Q owner saw group sales duck 0.5% during the three months to October as a result of these troubles.

I believe Kingfisher’s share price is in danger of swinging lower again in this climate, and do not reckon a cheap forward P/E ratio of 13.5 times could prove enough to save its bacon.

The post This FTSE 100 dividend share isn’t the only retailer I’d sell right away appeared first on The Twelfth Magpie.

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Royston Wild 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.