One that’s on my radar is menswear retailer Moss Bros (LSE: MOSB). The high street staple’s stock plunged over 30% in value earlier this month when its full-year 2019 trading update led off by saying “the board now anticipates that the group will deliver profit at a level materially lower than current market expectations.”  

But full-year 2018 results released this morning show that this poor performance set to begin the year could be a temporary blip rather than the beginning of the end for the firm. After all, in the year to January 27, revenue rose a respectable 3% to £131.8m while EBITDA fell marginally from £13.6m to £13.3m.

And this performance wasn’t due to an unsustainable store roll policy as its estate grew by only one location to 128. Rather, like-for-like sales grew by 1.6% in addition to online sales increasing by a whopping 13.5%. These figures are important as they show that Moss Bros collections are still resonating with shoppers enough that positive sales momentum is being seen even as revenue from hire sales continues to fall due to shifting consumer habits.

Battening down the hatches 

Looking forward, the company is also in a good position to ride out what management is telling us will be a terrible 2018 that has already seen like-for-like sales fall 6.7% in the first eight weeks of the current year. It had a net cash position of £17.5m at year-end and management is taking a sensible approach to maintaining this healthy balance sheet by trimming its full-year dividend from 5.89p to 4p year-on-year.

However, at its current share price, this still represents an 8.5% yield. And while any cut to dividend payouts is tough to take as an investor, especially when analysts were expecting steady increases this year, it’s good to see a management team being proactive.

In this same vein, the CEO said this morning that the firm will be seeking improved lease terms with building owners to take into account the recent drop in footfall at its stores. Even before any possible rent reductions, the estate was in good shape as all stores have been recently refurbished and the average lease length was 55 months, which gives management significant flexibility in adapting to the current situation.

Furthermore, some of the current pain appears to be largely self-inflicted as a reshuffle of its supplier base due to the weak pound led to low stock levels for the first months of the year that prevented it from keeping up with consumer demand. This was a painful misstep by management but is a fixable one as customers are still reacting positively to the group’s clothes.

That said, while I like the Moss Bros offering, plus the changes being made to adapt to shifting consumer shopping habits and its healthy balance sheet, I’ll be watching closely for a clear sign that trading is rebounding before I’d consider buying its shares.

The post Is this 8% yielder a top hidden value stock or red-hot falling knife to 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.

Looking ahead, the company expects those issues to continue in the near term. However, could it now offer strong turnaround potential for the long term?

Difficult period

Moss Bros has reported that it expects profit for the year to 26 January 2019 to now be materially below current market forecasts. Part of the reason for this is material short-term issues with the availability of stock. This follows the consolidation of the company’s supplier base in response to sterling weakness. It has affected all of its categories and is set to continue to having a negative effect on sales until late spring.

In addition, consumer demand has declined. Hire sales continue to be challenging, while the reduction in-store footfall which started in the latter part of 2017 has continued in the new calendar year.

Despite this, the company continues to invest in its long-term growth prospects. Notably, it is increasing investment in its digital offering, as well as in areas such as the customer experience. However, it has decided to change its dividend policy, and it is recommending a total dividend for the full year of 4p per share, which is less than the previous year’s 5.89p per share.

Turnaround potential?

Clearly, a turnaround is possible. Moss Bros seems to have a sound management team which has put in place a sensible strategy to put the business on a firmer footing for the long term. However, in the near term its problems seem unlikely to change significantly, and they could cause further downward pressure on its financial performance. Therefore, while now a relatively cheap stock, it could become even cheaper over the coming months.

In contrast, fellow retailer Morrisons (LSE: MRW) seems to be a strong turnaround candidate. Its recovery plan is on track, with it having made excellent progress in reducing net debt while also generating new, low-capital growth initiatives. For example, it has focused on leveraging its food supply division, which provides it with significant growth potential for the long term.

In the last two years Morrisons has been able to record positive earnings growth. This is set to be repeated over the next two financial years and could help to improve investor sentiment.

Certainly, the downbeat UK consumer outlook may cause investor sentiment to be held back to some extent over the medium term. But with a sound strategy which has still not yet had its full impact on the company’s operational and financial performance, further share price growth could be ahead over the long run. As such, now could be the right time to buy it.

The post Will the Moss Bros share price make a successful comeback after falling by 20%? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Morrisons. 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.

That said, it pays to be picky. Sky-high yields are often a warning sign of a looming dividend cut. With this in mind, let’s look at two market minnows and question whether investors should be tempted to dive in. 

Worth the risk?

Based on its current share price, news publisher Trinity Mirror (LSE: TNI) yields a massive 7.5% this year, safely covered by profits. On a valuation of just two times forecast earnings, it’s also as cheap as chip paper to pick up.

Before pressing the buy button however, it’s important to understand why the yield is so high and valuation is so low. A quick overview of recent performance is all that’s required.

The firm’s latest update revealed an 8% fall in like-for-like group revenue over Q3. While better than the 9% drop witnessed in H1, this is hardly anything to get excited about. Local advertising revenue in particular remains “challenging and volatile“, according to the business.

Broken down, evidence continues to mount that many of us are now going online for our daily news fix. Overall publishing revenue declined by 9% thanks to a 10% drop in print sales. Advertising and circulation revenue also fell by 16% and 7% respectively over the reporting period. When things are this bad, any mention of the company performing “in line with expectations” has little impact. If expectations are low, it’s not hard to meet them.

Perhaps I’m being a little harsh here. Elsewhere in the update, the company stated that it “continues to make progress” on a deal to secure the publishing assets of Northern & Shell (owner of OK! magazine and the Daily Express). The amount of debt on the company’s books also continues to fall. This stood at £19m at the end of Q3 — far better than the £92m recorded in 2015.

Nevertheless, with business looking shaky, I’d opt for a lower payout in return for less capital risk any day. 

A better income choice?

Formalwear retailer Moss Bros (LSE: MOSB) is another small-cap offering huge payouts to its shareholders. The stock yields 6.8% for the current financial year — over four times better than the top easy access savings account.

In sharp contrast to Trinity Mirror, recent numbers from this company have been encouraging. Back in September, the £92m cap reported a 2.8% rise in like-for-like sales in H1 (end of January to the end of July) compared to the same period in 2016. Pre-tax profit came in almost 16% higher at £4.2m. Early indications suggest this trading performance has continued into H2 based on a positive reaction from customers to its autumn and winter ranges.

A quick scan of the company’s financials also leaves me feeling quite positive. Moss Bros has no debt and is showing signs of generating far better returns on the money it invests compared to a few years ago.  Operating margins, while slim, are improving as well.

As you might expect, however, these positives are reflected in the share price. At 16 times forecast earnings for the current financial year, Moss Bros looks expensive. Moreover, with earnings predicted to remain flat in 2018/19, prospective investors shouldn’t expect huge capital gains anytime soon.  

Moss Bros remains on my watchlist for now.

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

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Paul Summers 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.

And even as competitors have wilted in the face of recent industry-wide headwinds, Moss Bros continues to perform very well. In the half year to July, total revenue was up 4.3% to £66.6m as the company opened up four new stores to take its total to 129 and increased like-for-like (LFL) sales by 2.8%.

Management is growing same-store sales by making its retail outlets more appealing through refurbishments, focusing on developing a stronger marketing identity than its previous reputation as just a suit hire shop, and expanding its e-commerce reach. Thus far these changes are paying off, with sales up and operating profits increasing a full 16.6% year-on-year in H1 to £4.2m even as the weak pound led to higher input costs.

With cash balances of £21.5m in the bank at period end and reducing capex requirements as its store refit programme nears conclusion, management was able to return the majority of earnings directly to shareholders via a £4m interim dividend of 2.03p per share.

After more than doubling earnings in the last five years, the company’s shares now trade at only 16.4 times forward earnings. I reckon investors who aren’t put off by the sector’s low barriers to entry or cyclical nature could find Moss Bros’ income and growth potential a boon to their retirement portfolio. 

One for the contrarians 

A riskier option I have my eye on is UP Global Sourcing (LSE: UPGS), which currently offers a 5.4% dividend yield and trades at 11 times forward earnings. The company designs, markets and imports a range of consumer goods such as pots and pans, irons and vacuum cleaners from factories in Asia and sells them to retailers such as B&M, Tesco, Amazon, and Argos among many others.

The company’s sales have taken off in recent years, and were up 39% in the year to July, but its share price more than halved in early September after management warned that poor consumer confidence and the weak pound was causing customers to delay orders and that it expected no sales growth in 2018. That said, full-year results released this morning show the company is in a decent place to withstand the situation as its net debt is just £6m, or 0.5 times EBITDA.

While customers not committing to orders far in advance, as they were doing, is a worry, it’s not the end of the world if it’s only a short-term problem and consumer spending proves more resilient than expected. Furthermore, UPGS should remain solidly profitable even if margins move downward next year.

Indeed, analysts are expecting a 30% drop in earnings per share next year but still forecast some 7.6p in EPS that would safely cover current full-year dividends of 5.115p per share and keep the company’s balance sheet in impressive health. Investing in a company that just warned it expects no sales growth next year takes a more risk-hungry investor than myself, but if the economy is on sounder footing than retailers expect, now could be a chance to pick up fast-growing, high-income UPGS at a relatively bargain price. 

The post 2 bargain growth and income stocks that could help you retire early appeared first on The Twelfth Magpie.

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

Poster boys

That may be true. But over the years, AIM has also become something of a graveyard for fledgling businesses that didn’t quite live up to their potential. A procession of speculative resource stocks and unknown international companies have fallen by the wayside to tarnish the image of AIM and give it a reputation as a ‘Wild West’ market.

But in recent years, a few of these smaller businesses have indeed gone on to achieve greatness, online fashion retailers ASOS and Boohoo.Com (LSE: BOO) perhaps being the most celebrated. Valued at around £4.8bn and £3bn respectively, both companies could be viewed as poster boys for London’s junior market.

Mouth-watering prospect

While ASOS’s origins trace back to the start of the millennium, Boohoo was founded as recently as 2006, and has only been trading as a publicly listed company since 2014. Turn the clock forward just three-and-a-half years, and the online fashion retailer’s shares are now changing hands at five times their original IPO price of 50p, as sales and profits soar in equal measure. Manchester’s best kept secret has quickly evolved into a global fashion leader of its generation.

Despite the spectacular success, Boohoo certainly isn’t resting on its laurels. In its last completed financial year, pre-tax profits doubled to £30.95m, as revenues soared 51% to £294.6m, with the acquisition of PrettyLittleThing and the Nasty Gal brand representing a step change in the size, structure and operation of the group.

For me, Boohoo remains a mouth-watering growth prospect given the group’s plans for further investment and expansion. Its styles may be very affordable, but the company’s shares come with an eye-watering price tag. With the much sought after stocks currently trading on a sky-high price-to-earnings multiple of 84, I’d wait to buy on the dips.

Suits you sir

In the meantime, those still keen on venturing into the world of clothing retail, should in my view take a closer look at Moss Bros (LSE: MOSB). The men’s formalwear specialist may be trading on London’s Main Market, but at under £100m is less than half the size of new arrival Boohoo.

While other high street retailers have struggled of late, Moss Bros has bucked the trend as it reaps the rewards of ongoing investment in a strong brand identity, and continues to forge ahead with its store refit programme.

With steady growth forecast to continue, I believe a forward price-to-earnings ratio of 17 isn’t too demanding when compared to the five-year average of 23. Meanwhile, dividend payouts continue to grow, with a hearty 6.5% yield currently on offer for would-be investors.

The post One growth stock I’d buy ahead of Boohoo.Com plc appeared first on The Twelfth Magpie.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. 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 business in question is personal injury-focused legal services group NAHL Group (LSE: NAH). In its half-year results today, the company confirmed that its performance so far this year is in line with expectations.

The group’s dividend policy remains unchanged, which means that the full-year payout should be covered 1.5 times by earnings per share. Based on forecasts for full-year earnings of 24p per share, that gives a total dividend of 16p. Today’s interim dividend of 5.3p supports this forecast, as NAHL’s final dividend is usually twice the size of its interim payout.

At the current share price of 132p, a dividend of 16p gives a yield of 12.1%. So what’s the catch? Why aren’t income investors buying as much stock as possible?

2 possible problems

NAHL is a business in transition. Changes to the regulations regarding personal injury claims have forced the group to reshape its business. It’s too early to say how successful this will be or whether profits will be sustained at historic levels.

The company expects 2017 and 2018 to be transition years. Analysts’ forecasts are for the group’s profits to fall by around 20% in 2018. I’d expect a similar cut to the dividend next year. But this still gives a prospective yield for 2018 of 9.9%.

Buy or sell?

There’s considerable risk here. But the group’s management has generally delivered well in the past, and its finances remains strong.

I’d argue that if NAHL can maintain profits at next year’s forecast level of around £9m, the shares could rise by about 50% from their current level. However, failure to deliver could result in permanent losses for shareholders.

How safe is this 6.6% yield?

Another company with a very high yield is men’s formalwear specialist Moss Bros Group (LSE: MOSB). This business hires and sells suits to customers and has, for several years, offered a generous yield of about 6%.

This dividend has not been covered by earnings since 2014. But the company’s strong net cash position, boosted by advance payments on hired outfits, has meant that this generosity has been affordable.

However, shareholders will know that the value of Moss Bros shares has fallen by more than 15% since May. While this has lifted the yield on the stock, I believe it’ also highlights growing risks to the dividend.

Clouds gathering?

Moss Bros’s trading update for the 15 weeks to 13 May warned of a 0.5% reduction in retail margins due to a midseason sale. This was introduced in response to “a much tougher trading environment”.

The update also revealed a 3.8% fall in hire orders, while like-for-like hire sales on a ‘cash taken’ basis fell by 14.2% during the period. This was due to the firm reducing the deposit it takes from each customer when hire orders are placed.

Pressure on both cash flow and profit margins appears to be growing. And with the stock already trading on 16 times forecast earnings, I think the dividend is the only thing supporting the share price. If the payout falls, I’d expect the shares to plummet. I’m not tempted at current levels.

The post This forgotten turnaround stock could yield 12% 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.

The masonry product play saw revenues dance 11.4% higher between January and June, to £162.7m, the company reporting a “double-digit increase in brick and block revenue” thanks to “good demand from the new-build residential market.” As a result pre-tax profits (before exceptional) moved 3.3% higher to £31.4m.

Despite facing the challenges of a rising cost base, Forterra is successfully passing these costs on to its customers. And the Northampton firm is expanding in other areas to give the bottom line an extra kick, it having snapped up precast concrete flooring specialist Bison Manufacturing for £20m last month.

Build a fortune

City brokers share my optimistic take on Forterra’s earnings potential and expect it to record earnings advances of 9% and 10% in 2017 and 2018 respectively.

Such projections, allied with exploding cash flows, are expected to keep dividends marching on. The 5.8p per share reward of last year is anticipated to explode to 9.2p in the present period, driving the yield to a very handy 3.3%.

And the forecasted 10.2p dividend for 2018 means that the yield rises to an even better 3.7%.

A smart choice

Moss Bros (LSE: MOSB) is another small-cap dividend star I believe all savvy investors need to check out today.

The suiter-and-booter, supported by a predicted 4% earnings rise, is predicted to pay a 6.2p per share dividend in the year ending January 2018, up from 5.89p in the previous period. And this projection means Moss Bros sports a titanic 6.7% yield.

And the good news does not end here. In fiscal 2019 the firm is predicted to pay a 6.5p reward, assisted by an estimated 6% bottom-line rise and yielding a mighty 7%.

Striding skywards

Moss Bros has seen its share price rupture in recent months, a steady slew of worrying data from the high street prompting share pickers to march toward the exits. The retailer has seen its share price sink 23% since the end of May.

But I see this weakness as a fresh buying opportunity as sales at the London-based business continue to move northwards. Whilst Moss Bros is clearly not immune to the headwinds created by the rising pressure on shoppers’ wallets, I am confident the massive investment it has made both online and in-store will pay off.

Moss Bros saw like-for-like sales in-store and online rise 5.5% during the first 15 weeks of the current financial year.

Internet sales shot 14.7% higher during the period. Furthermore, the business also noted that “[our] new format stores continue to trade ahead of non-refitted stores and are on track to achieve their anticipated payback targets.” And its re-fitting programme still has plenty left in the tank, with 28 of its 129 outlets still awaiting a fresh lick of paint.

With its multichannel approach clearly delivering the goods, I am confident Moss Bros — like Forterra — has what it takes to keep delivering meaty earnings and dividend growth for years to come.

The post 2 small-cap dividend stocks you must check out today 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

Its value has risen 15% since the start of May, hitting three-year peaks of around 115p in the process. And I reckon the retailer has scope for further gains.

Moss Bros advised last week that total sales during the 15 weeks to May 15 had grown 3.7% from a year ago, with like-for-like revenues up 2.3%. And underlying retail sales had risen 5.5% thanks to the strength of new ranges and the growing popularity of its online proposition (e-commerce sales detonated 14.7% in the period).

There is no doubt that Moss Bros will have to remain on its toes as consumer spending power comes under intense pressure — indeed, chief executive Brian Brick commented that “we continue to be acutely aware of the economic headwinds which we will face for the remainder of the financial year” as input costs rise and real wage growth slows.

Having said that, I have confidence that Moss Bros can beat the worst of these troubles as the massive investment the firm has made in its ranges, not to mention internet and high street operations, pays off.

Payout powerhouse

Against this backcloth it comes as little surprise that City analysts expect earnings to keep rattling higher. Indeed, current projections indicate that growth of 6% and 5% for the years to January 2018 and 2019 respectively can be expected.

And this impressive outlook lays the groundwork for dividends to keep heading northwards too. Last year’s 5.89p per share is expected to rise to 6.2p in the current period, and then to 6.5p next year.

Consequently the suiter-and-booter sports gigantic yields of 5.5% and 5.7%, smashing the 3.5% average for Britain’s blue-chips to smithereens.

Bricks beauty

And those seeking above-average dividends need to check out Forterra (LSE: FORT) too. Like Moss Bros, the masonry product maker has been no stranger to rampant buying activity in recent times, the stock hitting record peaks above 260p.

Investor faith was rewarded with the release of strong financials this week, Forterra advising that trading in the four months to April “has been good, building on the momentum seen towards the end of 2016,” with revenues up 6% year-on-year.

A robust new-build residential market saw brick sales volumes “well ahead” of the same period last year while, reassuringly, Forterra affirmed that it has successfully passed on increased costs to most of its customers.

So, unsurprisingly, City brokers expect it to generate earnings growth of 8% and 10% in 2017 and 2018 respectively, figures that are expected to fuel further dividend expansion. Indeed, last year’s 5.8p per share payout should rise to 9.1p and 10.1p this year and next, figures that yield 3.6% and 3.8%. And I reckon dividends should keep rolling higher given the robustness of Forterra’s end markets.

The post 2 dividend heroes with stunning momentum appeared first on The Twelfth Magpie.

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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.

Difficult outlook

Reporting on Friday was menswear retailer and hire specialist Moss Bros (LSE: MOSB). It reported an improvement in trading in the first 15 weeks of the year, with sales increasing by 3.7%. Sales growth of 2.3% on a like-for-like (LFL) basis was also encouraging, and shows that the company’s strategy is working well. E-commerce sales growth of 14.7% suggests that the company is adapting to changing consumer tastes, with 11.6% of sales now being online.

Looking ahead, Moss Bros is now entering its peak trading season, with weddings, Ascot and school proms set to take place over the coming months expected to provide a boost in performance. But with its bottom line due to rise by only 6% this year and by a further 5% the year after, its share price growth could be somewhat limited. That’s especially the case since the company’s shares trade on a price-to-earnings growth (PEG) ratio of 3.2.

With inflation moving higher and wage growth slipping back, consumer spending levels may fall over the short run. This could lead to lower-than-expected sales growth for retailers such as Moss Bros. Therefore, it would be unsurprising for its forecasts to be downgraded to at least some degree, which may lead to a declining share price. Since dividends are not covered by profit, this could put its 5.6% dividend yield under pressure.

High valuation

Also reporting on Friday was the UK’s largest listed residential landlord Grainger (LSE: GRI). It reported a rise in adjusted earnings of 39% in the first half of the current year. Net rental income has risen by 11%, with the company becoming more efficient and focused during the period.

Grainger is looking ahead to more growth as it believes the private rented sector growth opportunity is compelling and offers strong investment fundamentals. It anticipates the strong momentum of the first half of the year to continue now that it has secured £439m of private rented sector investment, half of its £850m target.

While Grainger’s long-term outlook may be positive, its near-term growth potential appears limited. For example, in the next financial year it is expected to report a rise in earnings of just 6%.

Despite this, Grainger has a relatively high valuation. It trades on a price-to-earnings (P/E) ratio of 21.5, which suggests there is only a narrow margin of safety on offer. As such, its share price could come under pressure and mean that, aside from a forecast dividend growth rate of 17% next year, there are no positive catalysts to push its share price higher.

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Peter Stephens 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.

Feel the width

Moss Bros Group (LSE: MOSB) is a lot more than just a place to hire fancy clobber for posh events these days. Refocusing in recent years and billing itself as the “first choice for men’s tailoring,” the company is aiming to produce a more attractive shopping experience at its stores. And in a move that would probably horrify some of its more traditional customers of yesteryear, it’s also moving online.

For the year ended January 2017, e-commerce accounted for 11% of sales, with a 15.7% rise over the previous year. Coupled with a 5.3% rise in overall like-for-like sales, tighter cost controls and targeted discounting, that helped boost pre-tax profit by 20% and EPS by 17%.

The company lifted its dividend by 6% too, and that leads to my focus here — Moss Bros’s forecast yields of 5.4% for the current year, followed by 5.6% next, on a share price of 115p. But before you rush out and snap up the shares, you need to know those payouts won’t be covered by forecast earnings. So what’s the story?

Back in 2014, the company massively raised its dividend to an uncovered 5p per share (from 0.9p), announcing “a commitment to a significantly increased dividend” while pointing to its strong cash generation. That’s stuck, with the 2017 report speaking of the debt-free nature of the business and its healthy cash balance, and saying: “It is our intention to continue this progressive dividend policy balanced against the wider investment needs of the business“.

In the long term, earnings will eventually have to match and exceed the dividend for that policy to be sustainable, but in the medium term the payout looks safe to me — and very attractive.

Huge dividend

The forecast 6% dividends from Moss Bros look almost paltry compared to the 7.9% and 8.1% yields expected from Connect Group (LSE: CNCT) over the next two years, following on from several years of inflation-beating progressive rises from the specialist distributor. 

What’s more, they’d be reasonably well covered by earnings at about 1.8 times, and we’re looking at P/E ratings of only around eight. So why the low rating for the 124p shares?

The firm’s net debt of £150m at February 2017 must be part of it, and with earnings per share actually forecast to fall by 12% this year (and recover by 5% in 2018) after remaining static for two years, I suspect there are fears that the growth tide for Connect might be ebbing. Coupled with the competitive nature of the business, I’m not really surprised that there’s some obvious pessimism.

But I don’t share it, and I reckon the company’s diversity through its News & Media, Parcel Freight and Books divisions (with the lesser-performing Education & Care division slated for disposal) stand it in good stead for the longer-term future. After all, it does count the mighty Smiths News among its customers.

If trading should weaken, or debt and borrowing become too troublesome, it’s possible the dividend could be cut. But with such a big yield on the cards and the shares on a low rating, and with no obvious threat to earnings in the medium term, I think there’s enough of a safety margin to make Connect look attractive.

The post 2 tempting shares with dividend yields of more than 5% appeared first on The Twelfth Magpie.

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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.