Nightmare tenants, unexpected property repair costs, and long void periods are also a constant risk, as my colleague Alan Oscroft explained recently.

On top of that, house prices in many areas of the UK have risen faster than rents in recent years, meaning that rental yields are lower than they used to be.

It seems to me that the only sensible way to do buy-to-let is as a full-time business, not as a small-scale sideline. That’s why I prefer to put my spare cash into the stock market.

But doing this doesn’t mean I can’t benefit from exposure to the UK’s fast-growing rental market. Today, I’m looking at two dividend stocks which both provide a useful dividend income and exposure to the property market.

Doubling down on housing

On Monday morning, outsourcing specialist Mears Group (LSE: MER) revealed plans to buy the housing maintenance business of rival Mitie Group (LSE: MTO) for up to £35m.

Mears is one of the bigger operators in this sector and generated revenue of £766m from social housing in 2017. Mitie’s operations are expected to add a further £100m of revenue, plus £200m in new orders.

At first glance, the deal makes sense for both companies. Mitie will get some much-needed cash to help reduce debt and invest in its core operations. Mears will be able use its larger scale to improve the profitability of the Mitie business, which reported an operating loss of £0.8m last year.

To fund the initial £22.5m payment, Mears plans to issue new shares to institutional investors. News of this plan has left the group’s share price 6% lower at the time of writing, but I think it’s a prudent measure.

The group’s average daily net debt was 2.3 times EBITDA (earnings before interest, tax, depreciation and amortisation) during the 12 months to 30 June. That’s pretty high by most standards. Borrowing more would have been unwise, in my view.

Mears’ debt is a risk for investors. But the long-term nature of its business, managing social housing and other rented property across the UK, suggests to me that it could be a reliable dividend buy. The shares currently trade on about 11 times forecast earnings with a 3.7% yield. I think they could be worth a closer look.

What about Mitie?

Although Mitie will still have some property maintenance operations after this sale, the group’s outsourcing business is more heavily focused on facilities management services, such as cleaning and security. Like Mears, the group faces tough competition on price from rivals and is burdened with a significant amount of debt.

However, the company is currently in full-scale turnaround mode under chief executive Phil Bentley, who expects to deliver £40m of annualised cost savings at a cost of £15m during the current financial year.

Analysts expect Mitie’s underlying earnings to rise 2.3% to 17.2p per share this year, supporting a full-year dividend of 4.1p per share. These figures put the stock on a forecast P/E of 9, with a prospective yield of 2.8%.

These shares aren’t without risk but, in my view, its cost saving plan and shift towards technology-led solutions are attractive. As a turnaround buy with long-term potential, I think Mitie rates as a potential buy.

The post Worried about buy-to-let? Here are 2 dividend stocks I might buy instead 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 seems that caution was well placed, and though there was a small price recovery shortly afterwards, it soon reversed itself and the shares are now down 8.2% since my words. And that’s almost entirely composed of Wednesday morning’s fall after the release of a first-half pre-close update.

The firm said it expects full-year operating profit to be “flat to slightly down” on last year. And though that is in line with prior expectations and was put down to “ongoing investment to drive faster top-line growth,” it was enough to drive investors into a sell-off. Revenue is expected to come in 2%-3% ahead.

“Performing well”

Chief executive Phil Bentley told us that “the majority of our businesses are performing well and our larger contracts are delivering solid growth in volumes and profitability,” though his comment about the industry remaining “highly competitive, especially when it comes to contract renewals” surely reminds us of the need to be careful.

My biggest concern was debt, and average daily net debt is now expected to be around £40m higher than last year at £278m, with a 30 September figure of £230m to £250m. The company says it should still be working within its banking covenants, and if Mitie does get back to earnings growth then debt should become less of a problem. And currently reduced dividend yields of 2.6% could be set to resume their climb.

I’m still cautious. H1 results are due on 22 November.

Overlooked dividend

I can’t help feeling that the dividends on offer from Galliford Try (LSE: GFRD) have been overlooked by investors, quite possibly because attention had been turned towards fears of a slowdown in the construction business.

That’s led to a share price fall of 35% since August 2015’s high point, which in turn has pushed the forecast dividend yield up to 6.8%. With EPS for the full year set to drop a bit, however, the question must be whether the company can afford that level of payment, which would be a few pence down on last year.

Results for the year ended June suggest that should not be a problem, with pre-exceptional EPS up 21%. The dividend was reduced by 10%, covered twice by earnings in line with the company’s current policy. The 6.8% dividend forecast for the next full year allows for a 13% EPS fall in the current year coupled with the same cover.

Why buy?

So why buy shares with a declining earnings and dividend forecast? Well, the period after a bull run when the share price of a solid company is depressed looks like a fine time to me to be buying shares. 

There are clearly worries over a post-Brexit downturn in the construction business, but I see significantly too much fear currently built in to the share price. We’re looking at a forward P/E here of only 7.5, and that’s for a company with fairly modest average net debt of £227m (compared to pre-exceptional pre-tax profit of £188.7m).

Even if the dividend were to yield only around 5%, I still think I’d be looking at an oversold long-term bargain — though I could still see some short-term volatility.

The post Have £2,000 to invest? These 2 hidden dividend stocks could help you retire early appeared first on The Twelfth Magpie.

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Alan Oscroft 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.

Mitie has its own debt issues too, and there are still fears in some quarters of further costs set to show up as the company’s new management continues with its balance sheet cleanup operation. My Foolish colleague G A Chester was rather prescient when he tipped the shares to fall further in November when they were priced at 202p, and since then they’ve dropped to 155p as I write. But that includes a recent uptick, and I see signs that Mitie is past the worst.

An update Friday told us that debt is “comfortably” within banking covenants, though I want to see its actual level when full-year results are out in June. At the interim stage at 30 September, the figure stood at £172.6m, and I hope it’s come down since then.

The worst over?

Sales growth is modest, and operating profit is in line with expectations. Cash generation has suffered as, among other things, Mitie gets back to a more conservative approach to invoice discounting and ‘normalisation’ of the balance sheet.

Chief executive Phil Bentley said: “We are one year into our transformation programme and we are making progress.” But is it too soon to be confident?

There’s risk, but with forecasts of EPS growth returning for the 2018/19 year, which would drop the P/E to around nine, I think the fear is largely in the share price. Yet I want to see those full-year figures first.

Energy woes

Lamprell (LSE: LAM) shares have been sliding for the past few years as the oil price crisis has hit, and were further hammered by a profit warning in September which went on to suggest that the outlook for 2018 was poor too. But with the price all the way down to 78p at the time of writing, are we now looking at a profitable recovery candidate?

We heard Friday that the firm’s joint venture in Saudi Arabia has cleared all initial hurdles and is set to formally commence business. Lamprell is expected to contribute up to $140m to the project’s construction, with the expectation of an order for 20 jackup rigs over the next 10 years.

Results for 2017, due on 22 March, are set to show a “significant loss” from the firm’s East Anglia One wind farm project, and analysts are expecting a fairly hefty loss per share of nearly 16p. Losses are forecast to continue until 2019, though the predicted loss of only 1.3p per share that year suggests Lamprell could be back to profit by 2020.

Buy?

Will Lamprell make it? I see reasons for optimism. It seems to have plenty of cash to see it through this tough period, and expects to have year-end net cash of $255m on the books. And though revenue for 2017 is expected to be around the $370m level, at least the year will fully account for the East Anglia project loss.

Assuming the company can beef up its order book, which is a key focus right now, I’m cautiously optimistic — and I see the Saudi project as evidence of a better long-term outlook.

The post Buying these 2 turnaround stocks today could make you a millionaire retiree appeared first on The Twelfth Magpie.

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Alan Oscroft 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.

Mark Hodges, chief executive of Centrica Consumer, said that the move “[is] vital to encourage customers to shop around for the best deal and make informed choices about energy” and comes in response to rising pressure on suppliers to cut their charges. Last month prime minister Theresa May vowed to finally introduce price caps to put an end to “rip off” power bills, with one eye clearly on those placed on SVTs.

Out of gas?

The rising pressure on household budgets that government is seeking to address is reflected by the steady stream of customers that are flowing from the ‘Big Six’ suppliers like Centrica and into the arms of cheaper, independent providers.

Latest data from trade association Energy UK showed 600,000 customers switching energy account in October, an 11% year-on-year rise.

And worryingly for the likes of British Gas, almost a third of swappers last month moved to a smaller supplier. Clearly Centrica may have to continue with further rounds of profit-sapping tariff reductions to stop its customers base steadily evaporating. The number of accounts on its books fell a further 4% between January and June from the same 2016 period, to 25,450.

These troubles are expected to push earnings at the FTSE 100 business 6% lower in 2017, a result that would mark the fourth consecutive annual drop, although a 2% rebound is predicted for 2018.

And I reckon the possibility of Centrica extending this record of bottom-line reverses is extremely strong given the pressures at British Gas and the uncertain outlook for the oil market. So even though Centrica deals on a low forward P/E ratio of 10 times, and carries a pretty-impressive dividend yield of 7.4%, I for one won’t be investing any time soon.

Plenty of headaches

Mitie Group (LSE: MTO) was also in the headlines in start-of-week trade following the release of half-year numbers. And like Centrica, I reckon share pickers should give the business a wide berth right now.

Mitie announced that, even though revenues increased 4% between April and September, to £959.7m, the cost of heavy restructuring had caused operating profit to tank 38.1% year-on-year to £14.8m.

The order book remained stable for the first fiscal half, at £5.9bn. But I am not convinced that the business will continue defying gravity given the intensifying headwinds battering the British economy. Meanwhile, rising debt adds an extra problem as this rose to £172.6m in the first half from £147.2m a year earlier.

What’s more, Mitie also announced today that is being investigated once again by the Financial Reporting Council (FRC), this time “in relation to the preparation and approval” of financial statements for fiscal 2016.

City analysts are expecting Mitie to flip into the black in the year to March 2018, with earnings of 15.8p per share expected, rebounding from the 14.7p loss of last year. And earnings are expected to rise again, to 19.7p next year.

I reckon the chances of these fluffy forecasts being cut to ribbons in the months ahead are high, however, and a forward P/E ratio of 14.3 times is not low enough for me at least to willingly hand over my investment cash.

The post Centrica plc isn’t the only value trap I’d avoid right now appeared first on The Twelfth Magpie.

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• With a 7% yield, is this dividend share a no-brainer?
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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.

Shares in Pantheon Resources (LSE: PANR) haven’t exactly been sparkling of late, dropping 47% over the past 12 months, to 53p. 

The oil and gas explorer, which operates in Tyler and Polk Counties in East Texas, has surely been suffering from the side effects of stubbornly low oil prices and the general feeling of gloom afflicting the whole sector. And, of course, there’s the fact that Pantheon isn’t actually making any profit.

But that could be all set to change, as analysts have profitability marked in for for the year to June 2018. And Pantheon looks to have the cash needed to break through to such heady days after a placing in July this year was apparently heavily oversubscribed.

Chief executive Jay Cheatham said that the new capital will enable the firm to accelerate its drilling programme, and told us that cashflow from Polk County was expected later this year.

Set to flow

The latest of a series of operational updates, on Tuesday, said the company has started drilling a sidetrack of its VOBM#4 well to target the Wilcox formation. This was encountered while drilling the main well, and it’s likely to take 30 days to complete the new exploration (barring problems).

With the assembly of the Kinder Morgan gas processing facility complete, saleable gas from Polk County is now expected to be flowing into the pipeline by November.

It’s not all sweetness, mind, as difficulties with hard rocks at the VOBM#2H well are expected to impact the ability to maximise flow rates. But Mr Cheatham says he’s “very excited about the potential of the Wilcox reservoir.“

Risky, but I’m optimistic.

Successful restructuring

Restructuring has been the order of the day for Mitie Group (LSE: MTO), after a bad patch that saw earnings crumble. For the year to March 2017, the facilities management and services outsourcer reported an operating loss of £42.9m. That was hit by a number of one-offs, though after excluding those, we still saw a £6.3m loss.

But even then, Mitie’s order book was standing solid at £6.5bn and its sales pipeline had risen 10% to £8.7bn.

Analysts are now predicting a return to solid profit this year, followed by a 21% hike in earnings per share next. In addition, the dividend, which was slashed in 2017, is slated for a return to progressive growth in the year to March 2019.

Recent feedback from the company is supporting that optimism, with a pre-close update in September saying that “we are making steady progress in the transformation of Mitie” and telling us that “top line growth in the first six months has been encouraging.“

Cost-cutting

A serious effort is being made to control costs too, with a strategy of outsourcing some of its own needs and consolidating some of its infrastructure expected to result in savings of around £40m per year by 2020. 

We’re looking at a forward P/E of 14 for the year to March 2018, dropping to under 12 by 2019 when the dividend yield is expected to be back to 2.1%.

That’s not screaming bargain territory, and a further fall in the shares over the past month does suggest there’s still some weak sentiment out there. But I see a reliable long-term investment here, and the shares are a cautious buy for me at the moment — especially as those buying now could be locking in big effective future dividend yields.

The post 2 hot turnaround stocks that could make you very rich appeared first on The Twelfth Magpie.

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• With a 7% yield, is this dividend share a no-brainer?
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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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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.

Does either stock deserve a buy rating, or is a recovery already priced into the shares?

H1 sales beat forecasts

FTSE 250 outsourcing firm Mitie Group (LSE: MTO) slumped to a £184m loss last year. But acting chief executive Peter Dickinson appears to be making progress with the group’s turnaround.

In a trading statement this morning, the company said that half-year revenue is expected to be £1.1bn. This is “better than anticipated” and is 4% higher than for the same period last year.

Management’s plan is to automate or outsource many administrative and IT functions. London offices are also being consolidated from three into one. These measures are expected to result in cost savings of £40m a year by 2020.

This complex transformation programme is going well, but is costing more than anticipated. Transformation costs are now expected to total £24m this year, a lot more than the previous estimate of £15m.

Trading outlook

Mitie’s order book rose by 3% to £6.7bn during the first half. However, some of the firm’s new contract wins were offset by the unexpected loss of a “top 20 contract” which was not due to expire until 2019. No explanation of this was provided but the company says it will result in a £6m non-cash write-off.

The overall picture appears reasonably positive, as Mitie does seem to be gradually leaving its problems behind. The company’s share price hasn’t moved following today’s statement, which suggests that City investors believe Mitie is still on track to deliver results in line with market forecasts this year.

On this basis, the stock trades on a forecast P/E of 15, with a prospective yield of 1.9%. I’m not sure it is a compelling buy, but I would hold at current levels.

The tide could soon turn

Shares of bus and train operator Go-Ahead Group (LSE: GOG) have fallen by 27% so far this year. The group recently reported a 10% fall in earnings and warned that the profitability of its rail business was likely to fall during the current year. These results received a poor reception and the stock is currently trading at its lowest levels since 2013.

There’s no doubt that Go-Ahead’s performance has been disappointing. But the firm’s profits only fell by 10% last year. By contrast, the group’s shares have fallen by 20% over the last 12 months. I think there’s a possibility that the stock is now trading in value territory, and could be a contrarian buy.

Consensus forecasts suggest that the group’s earnings will fall by around 7% this year and in 2018/19. This has left the stock trading on a forecast P/E of about 9, with a prospective dividend yield of 6.3%.

Net debt remains reasonable relative to earnings and the dividend is still comfortably covered by earnings.

The big risk is that the group’s profits may yet fall further than expected. Although I’d rate the stock as a potential turnaround buy, investors looking for a big win may need to be patient.

The post 2 top turnaround stocks that could make you brilliantly rich appeared first on The Twelfth Magpie.

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• With a 7% yield, is this dividend share a no-brainer?
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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

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.

The losses were largely caused by one-off costs and the market seemed impressed with the underlying performance at the recovering business.

Adjusted operating profits fell only 13.9% to £82m, after overheads grew and revenues largely remained flat. More importantly, cash generated by operations ballooned from £85.2m to £122.8m and was used to take a chunk out of the debt pile, reducing net debt to £147.2m (FY16: £178.3m). In my opinion, these figures form the best picture of how business is proceeding at Mitie.

The board did not recommend a final dividend, bringing the total dividend for the year to 4p, compared to 12p last year. 

Sliding service shares

The company has reported a string of profit warnings over the last couple of years. On top of that, an accounting review found “material errors” back in May, knocking £50m profit off of 2016/17 results. Advisor KGM said the overstatement was caused by aggressive customer contract accounting compared to sector peers. The balance sheet will also be hit by a writedown of between £40m and £50m.

When combined with a £14m one-off charge in January, these adjustments will significantly impact results and valuations given the group made only £76m last year.  The company has lined up Derek Mapp as the next chairman, alongside new CEO and CFO Phil Bentley and Sandip Mahajan respectively in a bid to turn performance around. 

Mitie has also sold its lossmaking healthcare business in an effort to focus on core, profitable areas. Its strategy is solid, if not compelling, and consists of a focus on culture and advanced technological solutions. The company has also launched a programme dubbed Project Helix that aims to generate £45m in savings a year.

Given the wholesale replacement of management, I’m expecting the kitchen sink to come flying out the HQ window soon, so investors who hold the shares would do well to prepare for writedowns, in my view.

Despite steady trading, I’d avoid Mitie and the entire service sector.  You see, multiple companies will bid for a service contract, resulting in a race to bottom on price and profitability. Often, the job goes to the lowest bidder, resulting in poor services and a disadvantage in the renewal process. This, combined with paper-thin margins and an austerity-focused Tory party puts me off of service companies in general.

Locked into long-term losses

Serco too is on a long and winding road to recovery, according to CEO Rupert Soames. The company has suffered a number of contract issues, scandals and profit warnings in recent years.

Mistakes were made operating the Compass UK asylum seeker support contract alongside G4S. The contracts, which were signed in 2012, have been extended until 2019. Costs have risen far beyond expectations and Serco has been unable to negotiate significant pay increases. When the deal expires, Serco expects to have lost £112m overall.

G4S is set to lose £107m for similar reasons. This contract perfectly demonstrates the dangers of working in a competitive, low-margin industry. Dividend investors would do well avoiding service companies altogether.

The post What do results at Mitie Group plc mean for the service sector? appeared first on The Twelfth Magpie.

More reading

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• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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Zach Coffell 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.

Indeed, embattled outsourcers Capita Group (LSE: CPI) and Mitie Group (LSE: MTO) have both seen their share prices leap in recent months.

Although still trading at an 47% discount to levels seen on the eve of the referendum result, Capita has picked up more recently and touched its highest since November earlier this month. And its FTSE 250 peer has fared even better, a share price spurt this month leading it to trade just 11% lower from levels seen on the day of the EU vote.

Investment questions

But the investment community is being just a bit too hasty jumping back in now, in my opinion. Both companies have had to issue a stream of profit warnings since the autumn as trading activity has slowed down. And recent economic data suggests that the revenues outlooks at both Mitie and Capita remain less-than-compelling.

The Bank of England’s latest inflation report this month led many to claim fears of cooling business investment had been overdone.

The Old Lady of Threadneedle Street suggested that the near-term outlook had improved since its last report in February, with supportive credit conditions, resilient demand and the incentive created by weak sterling for exporters to invest prompting businesses to pull out their chequebooks once again.

However, the Bank noted that “a number of exporters and foreign‑owned firms remain cautious about larger investment decisions due to uncertainty around future UK trading arrangements.” And it said that this caution could be set to persist, adding that “uncertainty surrounding the United Kingdom’s future trading arrangements is likely to weigh on firms’ investment intentions in coming years.”

Lasting woe?

With no signs of an imminent upturn in spending, the City expects Capita to endure a 4% earnings fall in 2017, following on from last year’s 20% slide. And given the possibility that this bottom-line weakness could well last beyond this year, and these forecasts suffer severe downgrades in the months ahead, I do not think a forward P/E ratio of 10.5 times is attractive enough to tempt savvy investors.  

Likewise, Mitie Group is predicted to have suffered a shocking 50% earnings drop in the year to March 2017, although it is expected to rebound with a 31% rise in the present period. However, this forward projection still creates a shockingly-high P/E multiple of 14.6 times and, given that conditions are still yet to improve on the ground, this heady rise looks a tad optimistic to me.

The business advised just last month that revenues flatlined in the last fiscal year, “reflecting what has been a challenging environment.”

Patchy projections

Given this backcloth, I think stock pickers should ignore predictions of chunky dividends and invest elsewhere. And they are undeniably chunky. In 2017 Capita is anticipated to maintain the 13.7p per share of the past two years, yielding 5.7%.

Mitie, meanwhile, is predicted to bounce from a severe dividend cut (a 7p payout is expected for fiscal 2017, down from 12.1p in the prior year) and to lift the reward to 7.8p. This forecast yields a market-beating 3.7%.

But until more clarity surrounding the UK economic outlook becomes apparent, I believe both outsourcers are a risk too far at present.

The post These FTSE 250 dividend stocks look dangerously overvalued appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Royston Wild 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.

By contrast, shares of outsourcer Mitie Group (LSE: MTO) rose by 6% after it said that an accounting review would result in expected writedowns of £40m-£50m.

So why has Galliford tumbled while Mitie has flown? One reason, of course, is that we already knew Mitie had problems. The bad news from Galliford was a surprise. The second reason is that, as I’ll explain, Mitie’s news could result in the firm’s 2016/17 profits beating expectations.

What’s gone wrong at Galliford?

Galliford is both a housebuilder and a construction firm. It’s the construction business that has problems, with significant cost overruns on “two major infrastructure joint venture projects” with fixed-price contracts.

The company says that “a reappraisal of costs and recoveries” has led the firm to expect non-recurring costs of £98m between now and mid-2018. This is a significant amount of cash, given that the group’s full-year profit was expected to be £124m this year.

Despite this, the group expects to pay a final dividend in line with expectations for the current year, giving a forecast yield of 7.1% at the current share price of 1,330p.

Time to buy?

Galliford’s housebuilding business appears to be performing well. In construction, the group says that its newer contracts are contributing to an improvement in profit margins and do not have the same risk of cost overruns as older contracts.

Today’s dip could be a buying opportunity. However, I’m concerned about the impact these hefty cash costs will have on the balance sheet. I plan to wait for the firm’s next set of accounts before considering whether to buy.

Is Mitie really on the up?

Markets hate uncertainty, but they have short memories. This combination could explain why Mitie Group’s shares have risen by more than 6% so far today.

Investors aren’t overly worried about an extra £40m-£50m of balance sheet writedowns, most of which are non-cash. Better still was that the group said “material errors” discovered in its 2016 accounts would actually result in an increase of £10m-£20m in its 2016/17 reported results.

I’m not sure that this rather odd piece of news warrants much celebration. I’m more concerned about whether Mitie’s debt situation will force the company to raise cash from shareholders.

It said today that although the group’s year-end net debt of £146m was within covenant limits, headroom is expected to be “limited”. So the group is going to ask its lenders if they’ll agree to relax their covenants to “remove the risk of a possible technical breach”.

The group’s lenders will have access to more detailed information about cash flow and outlook than we do. They may agree to the firm’s request. But I suspect that new chief executive Phil Bentley may end up opting to raise cash through a placing or rights issue. By doing this at the start of his tenure, he should be able to avoid problems down the line.

Mitie may well become an attractive recovery play. But I’d like to learn more about the group’s financial situation before making a final decision. For now, I’m going to avoid this stock.

The post Why I’m avoiding these ‘bargain’ FTSE 250 dividend stocks appeared first on The Twelfth Magpie.

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Roland Head 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.

Indeed, the outsourcer model is inherently flawed because these businesses operate with razor-thin profit margins. When bidding on contracts companies usually put in the lowest bid possible to try and win the business, which offloads risk from the seller to the buyer. The combination of these two factors means outsourcers have almost no margin for error when things don’t go to plan.

And the recent performance of shares in Mitie (LSE: MTO), Interserve (LSE: IRV), Capita (LSE: CPI) and Serco (LSE: SRP) is an excellent example of how investors suffer the fallout from outsourcers’ poor business model.

Falling knives

Over the past 12 months, shares in Capita have plunged by more than 49% as the company has issued multiple profit warnings. Shares in Mitie have fallen 29% over the same period, and shares in Interserve are down by 44%. Serco is the only company to have seen a positive share price performance. Since February last year shares in the group have gained 46%. But to put this into some perspective, over the previous five years the shares were down by a staggering 78%.

Not one of these companies has seen a positive share price performance over the previous five years. The best performer among them has been Capita. Since February 2012 the shares are only down by 15% excluding dividends.

These declines have left Serco, Interserve, Mitie and Capital looking relatively attractive on both a valuation and yield basis but considering the sector’s underlying issues, I’m staying away at all costs.

Value traps

Capita is the perfect example of a company that looks cheap but could be a value trap. The shares trade at a forward P/E and support a dividend yield of 6.1%.

Following the company’s numerous profit warnings, management has decided to sell the business’s asset services division, arguably the group’s crown jewel. Proceeds from the sale will be used to reduce debt and fund the dividend. This could be the first of many sales as the company sells off assets to make up for past mistakes and returns cash to investors.

On a historic basis, shares in Mitie support a dividend yield of over 6%, but after the firm’s recent profit warning, management has cut the payout by 40%. Earnings per share are expected to fall 47% for the year ending 31 March 2017 and not return to last year’s level before the end of the decade. Trading at a forward P/E of 17.5, the shares look overvalued.

Shares in Interserve trade at a forward P/E of 5.3 and yield 10.8% but this lofty dividend might not be around for long. Management warned last week that net debt for 2017 would average £450m, 38% above the group’s current market capitalisation of £326m, a big red flag for investors.

After several rocky years, Serco is struggling to get back on track. City analysts expect the firm to report earnings per share of 3.1p this year, indicating the shares are trading at a forward P/E of 54, a high multiple for a struggling business.

The post Why I’m avoiding these four falling knives appeared first on The Twelfth Magpie.

More reading

• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.