I noticed that N Brown Group (LSE:BWNG) shares have been on a downward trajectory for some time. Is the current N Brown share price an opportunity to buy cheap shares? Let’s take a closer look.

Direct home shopping retailer

As an introduction, N Brown is a digital UK retailer specialising in clothing and footwear. It has recognisable brands under its umbrella including Jacamo, and Simply Be. Notably, it has roots stretching back over 160 years and is currently supported by close to 2,000 employees.

So what’s the current state of play with the N Brown share price? As I write, the shares are trading for 21p. At this time last year, the stock was trading for 47p. This is a 55% discount over a 12-month period.

Risks and the reasons behind the N Brown share price fall

I believe N Brown shares have come under pressure in recent months due to macroeconomic headwinds out of its control. Soaring inflation, the rising cost of raw materials, as well as a supply chain crisis have all contributed.

For example, soaring costs can eat into profit margins, which can then impact shareholder returns as well as investor sentiment. Supply chain issues negatively affect day-to-day operations such as product availability. Due to rising inflation, a cost-of-living crisis has emerged. Many consumers have less money to spend on clothing and footwear, as they prioritise food and energy, both of which have risen in price.

Finally, competition in the clothing and footwear market has intensified in recent years. This is linked to the rise of online fast fashion. More traditional retailers, like N Brown, are seeing more competition from companies that are able to make the most of the fast fashion trend and offer cheaper products to consumers.

Positives and my verdict

In terms of the positives, N Brown’s diversified business model is a plus point. It caters for different markets, such as the plus size market, as well as more affluent consumers through its JD Williams brand. The plus size offering, in particular, has risen in prominence in fashion in recent years. In addition, I believe N Brown’s long history sets it in good stead to be able to navigate times of volatility, like now, with useful experience.

Due to the N Brown share price drop, the shares look cheap currently on a price-to-earnings ratio of just over six.

So what about N Brown’s performance? Although I do understand past performance is not a guarantee of the future, I review it to learn more about a business. Looking back, I can see it has recorded consistent, although slightly falling, revenue and profit for the past four years. An interim report released today for the 26 weeks ended 27 August was a mixed bag. Revenue and profit dropped, but on a positive note, debt levels fell, and net cash increased. Both of these will help boost potential growth initiatives, as well as investor sentiment, in my opinion.

To summarise, it is clear to me that N Brown shares are a victim of current volatility. For this reason, I am going to keep them on my watch list for now. I will continue to monitor developments to see if I should change my stance in the near future.

The post Is the falling N Brown share price an opportunity? appeared first on The Twelfth Magpie.

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Jabran Khan 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.

However, while I’m concerned about this situation, I think the shares are unlikely to go to zero. Indeed, although the situation remains uncertain, I’d argue a recovery is possible.

Two good reasons

In my last piece on 6 June, I took a grim view of Kier’s rising debt. I’m happy to say a more recent update on 17 June has caused me to take a slightly more positive stance.

The first reason for this is Kier plans to sell or scale back various non-core parts of its business. The group’s housebuilding division, Kier Living, is up for sale. And its property development business, Kier Property, will be scaled back or sold as well.

Based on the numbers provided by the company, I estimate these changes should bring in £120m-£200m of cash. More importantly, the amount of working capital — or cash in hand — Kier needs to fund its operations should fall. This is expected to result in a lower average net debt level through the year.

The second piece of good news is that Kier is not currently in financial distress. Although debt levels have risen above expectations, the company’s average month-end net debt of £420m-£450m is still well below the £920m available under its current debt facilities.

These lending arrangements will need to be renewed at various times between 2021 and 2024. But it’s clear Kier has the kind of breathing room that Carillion simply didn’t have.

Would I buy Kier?

I think chief executive Andrew Davies is taking the right decisions. However, the scale of change he’s planning means the outlook for profits is unclear to me.

I suspect Kier shares may offer some value at current levels. But this situation remains too risky for me. I’ll be staying on the sidelines for now.

This retailer looks cheap

Online-based fashion retailer N Brown Group (LSE: BWNG) has seen its share price fall by 60% over the last five years.

The group’s main businesses are Jacamo, Simply Be and Ambrose Wilson. Management has been gradually repositioning these value brands as online operations, while scaling back its catalogue and store operations.

Last year saw gross profits from product sales (clothing) fall by 5.8% to £320.8m. This shortfall was partly compensated for by an increase in interest income from customers buying on credit, which rose 7.1% to £176.9m.

The credit business is obviously a powerful source of profit (as it is for Next). The question is whether the company can return product sales to growth. A trading update last week suggested there may be some signs of hope. Although total product sales fell by 5.4% during the first quarter, online sales rose by 3% over the same period.

From what I can see, falling product sales reflect the firm’s decision to scale back various legacy parts of its business. What’s left should be a profitable online operation.

The situation isn’t without risk, but the stock now looks cheap on just 6.1 times 2019/20 forecast earnings, with a 5.5% dividend yield. In my view, N Brown could be worth a closer look.

The post Is the Kier share price heading for zero? 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 only problem with cash savings is that the interest rates available are so low. At the time of writing, the best easy-access cash ISA I could find was offering a 1.45% interest rate. If you were happy to tie up your money for three years, you could get 2.05%.

By contrast, the FTSE 100 currently offers an average dividend yield of 4.6%. And if you’re willing to invest in individual stocks, I believe the market offers several opportunities to earn a reliable yield of 6% or more.

Four payments each year

One stock I’d buy for a regular income is oil giant BP (LSE: BP). This company pays quarterly dividends, providing a more even spread of cash payments through the year.

From what I can see, the payout has only been cut twice in the last 25 years — once in 1999/2000 and once in 2010, after the Deepwater Horizon disaster. On both occasions, the board rebuilt the dividend as a priority.

When the price of oil surged up to $85 last year, the BP share price hit a post-2010 high of 603p. The shares have now pulled back to around 515p and offer a tempting yield of 6% that should be covered comfortably by earnings and free cash flow.

Although the group’s debt levels remain a little higher than I’d like to see, chief executive Bob Dudley has judged market conditions well in recent years. I expect this to continue. With the shares trading on 11 times earnings and offering a 6% yield, I see this as a buy-and-forget stock for income investors.

How safe is this 9% yield?

Of course, it would be nice if we could earn more than 6%. But dividend yields above this level often carry a much higher risk of being cut. One high-yield stock I’ve been watching for a while is fashion retailer N Brown Group (LSE: BWNG). This firm’s main brands are JD Williams, Simply Be and Jacamo.

N Brown’s share price has fallen by around 80% over the last five years. Profit margins have slumped as the group has struggled with the transition to internet trading and faced a number of financial issues.

Some progress has been made. Offline operations are being scaled back and the internet now accounts for 78.5% of sales from the group’s three main ‘Power Brands’. But problems remain.

The outcome of a VAT dispute means that marketing costs will be £6m-£9m higher from 2019/20 onwards. The company also expects profit margins to fall again during the current year. One-off extra costs for the current year are expected to be above £67m — an amount that’s more than the company’s entire pre-tax profit last year.

N Brown’s customer credit business is profitable and is said to be performing well. But profit margins are continuing to fall in the retail business, while unexpected costs continue to rise.

The forecast dividend yield of 9% may seem tempting. But the payout has been cut this year and I believe the market is right to be cautious. In my view, further pain is likely for shareholders. I’d avoid this stock.

The post Forget the cash ISA. I’d collect 6% from the BP share price 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.

Market corrections can be uncomfortable, but if you own shares in good quality companies it’s often worth thinking about topping up your stock holdings, rather than selling.

Today I want to look at two FTSE 250 stocks that have fallen by far more than the wider index. Are these firms in trouble or could this be a buying opportunity for savvy investors?

A tale of two halves

Shares of WH Smith (LSE: SMWH) were down by 13% at the time of writing this morning after the firm revealed said it would start closing some of its high street stores.

It’s no secret that its travel business has been powering the group’s growth for several years. Newsagents in airport and railway stations in the UK and overseas have delivered rising profits that have offset falling high street profits.

Today’s full-year results show that this shift is continuing. Travel profits rose by 7% to £103m, while high street profits fell 3% to £60m. Adjusted pre-tax profit rose by 4% to £145m, although statutory pre-tax profit — including one-off costs — fell by 4% to £134m.

Lots of cash

The high street division is a drag on profits, but this group still generates a lot of spare cash. Free cash flow fell by 8.6% to £96m last year, but that’s still equivalent to 87p per share.

All of this cash will be returned to shareholders through a 12% dividend increase to 54.1p per share and a new £50m share buyback.

The costs of exiting WH Smith’s high street shops are a potential concern — £9m was spent on this last year and the firm expects to spend a further £5m this year.

But the group’s exceptionally high return on capital employed of 60% suggests to me that the business should continue to generate plenty of cash. With the stock trading on 15 times forward earnings and offering a 3.1% yield, I’d consider buying during this market wobble.

I’m staying away

Online fashion retailer N Brown Group (LSE: BWNG) is down by 20% at the time of writing after reporting a 5% fall in half-year profits and a 50% dividend cut.

I suspect we know now why chief executive Angela Spindler stepped down in September.

Product sales fell by 3.1% to £304.5m during the half-year period. Group sales only eked out a 1% rise because of a 12.7% increase in financial services revenue — fees from customers who buy on credit.

The company also announced £65m of new impairment charges. These include £22.4m of compensation for PPI claims and £22m relating to store closures.

A deep value buy?

Interim CEO Steve Johnson said that full-year expectations are unchanged. But I suspect brokers will cut their profit forecasts after today’s 5% drop in earnings, which is below expectations for broadly flat profits this year.

I estimate that the shares currently trade on about 5 times forecast earnings with a 6.6% dividend yield. This could be a value opportunity, especially given the value of the group’s £677m loan book.

However, I’m not convinced by the quality of this retail business here and fear further problems. I’m going to stay away for now.

The post One slumping FTSE 250 dividend stock I’d buy today and one I’d sell 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 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.

Nice bite

Frankie & Benny’s owner The Restaurant Group (LSE: RTN) is up 2% in early trading despite posting a 3.7% drop in like-for-like sales this morning, which shows just how how far investor expectations have fallen in the dining-out sector.

After a tough three years where the share price has fallen 60%, the market preferred to focus on the news that sales rose 2.4% in the six weeks to 26 August as the group enjoyed “good momentum post the end of the World Cup”. Investors also swallowed the positive management line that it has made “further progress to increase competitiveness of our brands”, while its pubs business outperformed the market.

Feed me

The Restaurant Group is also growing through acquisitions, notably the post-period purchase of Food & Fuel consisting of 11 premium leasehold pubs in affluent London locations for £14.9m.

This is a company in turnaround, though, with adjusted profit before tax for the 26 weeks falling from £25.5m to £20.1m, adjusted EBITDA down from £44.3m to £38.1m and adjusted earnings per share (EPS) dropping from 10p to 7.8p. Operating cash flow fell sharply, from £46m to £25.6m.

Hard to swallow

CEO Andy McCue said extreme weather and the World Cup were challenges for its brands, which also include Garfunkel’s, Coast to Coast, Chiquito and Joe’s Kitchen. However, thanks to the recent pick-up it is on course to hit profits expectations, allowing the board to maintain the interim dividend at 6.8p per share.

It now yields a forecast 6.2% although cover is thin at 1.3. These concerns are reflected in a price of 12.8 times earnings. EPS are forecast to fall 3% in 2018, then grow 5% in 2019. My Foolish colleague Edward Sheldon has little appetite for it, and I would chew this one over very carefully too.

Brown down

Digital fashion retailer N Brown Group (LSE: BWNG) has been an even more brutal disappointment, falling 56% in the last year. Since peaking at around 587p in February 2014 it has withered to just 147p, leaving loyal investors seriously browned off.

The group has been hit by challenging conditions in the retail sector, but net-based shopping has been a rare bright spot, so you would hope that N Brown could get it right here at least. There are signs of progress, with total online revenues up 3% in the last quarter and so-called Powerbrands like Jacamo and JD Williams rising 9%.

Double-digit income

The Manchester-based group is considering closing its final 20 stores, which should slash overheads and sharpen its focus on the web. The £420m enterprise is trading at a dirt cheap valuation of just 6.2 times earnings and despite holding its dividend at 14.23p for the last five years it yields a whopping 10%.

EPS are forecast to fall 1% this year but rise 5% in 2020. This could be a good fit for your income portfolio, if you don’t mind taking a gamble on management finally getting its digital strategy right.

The post Are these 6% and 10% dividend income stocks fantastic bargains or value traps? appeared first on The Twelfth Magpie.

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harveyj 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.

If this whetted your appetite then step this way: the two tiddlers I’m looking at could also make you a fortune in the years ahead, and have the added bonus of offering above-average dividend yields.

Making an entrance

It didn’t surprise me when the Tyman (LSE: TYMN) share price spiked last week in response to its latest financials.

In the statement covering the six months to June, the window-and-door-component-builder noted that revenues swept 6% higher, to £274.9m, a result that drove underlying pre-tax profit up by the same percentage to £33.3m.

Tyman is reaping the fruits of strong North American markets and the ongoing recovery in the Europe, Middle East, Africa and India (EMEAI) block, conditions that look set to underpin solid earnings growth in the near term and beyond. And investors should also be encouraged by the company’s ability to spot exceptional takeover targets and get them firing from the first day. Its purchase of Dallas-based Ashland for $101m in March is already performing better than expected, and is predicted to be profits-enhancing in 2018, a full year ahead of schedule.

City analysts agree with my positive take, pencilling in profits increases of 5% in 2018 and 10% in 2019, meaning Tyman can be picked up on an undemanding forward P/E multiple of 12.3 times. An added bonus is that these predictions provide the bedrock for them to predict further dividend growth to 12p and 12.8p for this year and next respectively, numbers that yield a chunky 3.5% and 3.7%.

That 9% yielder

While much of the high street is under pressure as consumer spending power wilts, I am convinced that N Brown (LSE: BWNG) has the substance to ride through these troubles and deliver excellent long-term returns.

The revenues rise in the three months to May was reassuring rather than rambunctious, up 0.4%, but it goes to show how its plus-size and over-50s ranges remain in demand even in extremely challenging retail conditions. Its sales resilience also owes a debt to the success of its advertising campaigns, not to mention the results of its ‘Fit 4 the Future’ IT transformation projects, like creating a more personalised service for its website users.

Indeed, I’m really interested in how the company is doubling-down on the online shopping segment and what this means for the future of its key labels. Internet sales of its so-called Powerbrands like Jacamo and JD Williams rose 9% in the last quarter.

So City analysts are expecting N Brown to bounce from a predicted 1% earnings decline in the year to February with a 5% rise the following year. This should give the firm the confidence to keep the dividend locked around current levels at 14.23p per share meaning share-pickers can enjoy a staggering 9.6% yield.

What’s more, at current prices, N Brown changes hands on a dirt-cheap forward P/E ratio of 6.5 times. This factors-in the possibility that tough retail conditions drag out longer than expected. Indeed, I reckon this low valuation leaves plenty of upside as the company’s online operations go from strength to strength.

The post 2 small-cap dividend stocks that could be millionaire-makers appeared first on The Twelfth Magpie.

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• 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?

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.

Barratt Developments (LSE: BDEV) stock is worth 15% less than it was one month ago, despite the firm confirming today that it expects to report record profit for the year ending 30 June.

The share price edged higher on Wednesday morning but remains under 500p at the time of writing. At this level the shares offer a forecast ordinary dividend yield of 5.2%. When you include this year’s planned £175m special dividend, the total forecast yield rises to 8.7%.

A strong year

During the year ended to June, Barratt sold 17,578 houses, the highest level since 2008. Sales rates were broadly unchanged and management expects to report a record pre-tax profit of £835m for the year. That’s 9% ahead of last year’s figure of £765.1m.

Net cash at the year-end was expected to be £790m, ahead of guidance and providing firm support for ongoing dividend payments. The company ended the year with a forward order book of £2,175m.

The recent sell-off in the housebuilding sector suggests that the market expects profits to fall. But analysts’ forecasts for Barratt suggest that earnings per share could rise by about 5% to 67.6p next year. The tone of today’s statement suggests to me that management is also confident in this outlook.

Clever building

One of the secrets to Barratt’s resilient profits may be that it’s invested in new housing designs that are faster and cheaper to build. These are being rolled out across the company’s building sites and are expected to deliver higher profit margins. This means that even if house prices and sales volumes are flat, profits should rise.

Although I think the housebuilding sector carries some risk at the moment, my view is that Barratt shares look decent value at around 500p. I’d be happy to buy at this level.

Another 8% yielder

Housebuilders aren’t the only stocks offering high yields at the moment. A number of out-of-favour retailers are also offering generous payouts.

One example is online fashion retailer N Brown Group (LSE: BWNG), whose shares currently offer a whopping forecast dividend yield of 8.7%. This former catalogue specialist has been investing in its online operations in recent years and now appears to be positioned for a return to growth.

Although the group reported net debt of £346.8m at the end of last year, most of this cash is used to fund the customer loan book. This was valued at £598m. So we can see that the value of the customer loan book comfortably cancels out the company’s borrowings. As customer loans are an asset that could be sold to raise cash, I’d view this business as effectively being debt-free. The only risk is that customer defaults could rise sharply during a recession.

Too cheap to ignore

The shares appear to be extremely cheap, trading on about 7.4 times forecast earnings for the current year.

The main problem appears to be a lack of growth. Revenue rose by just 0.4% during the first quarter and profit margins are expected to be broadly unchanged this year, leaving profits largely unchanged. Despite this risk, I think these shares could be worth considering at current levels.

The post An 8% yield tells me the Barratt share price could be about to soar 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.

I’ll return to this tempting prospect in a moment, but first I want to take a brief look at a company whose latest trading figures suggest to me that it could be a good income buy.

I’d bet on this

Bookmaker William Hill (LSE: WMH) is a well known name on the high street. But many investors don’t realise that this company generates about half of its operating profits either online or abroad, in the USA.

Today’s first-quarter trading statement suggests that this shift is continuing. UK online revenue rose by 12% during the quarter, while high street revenue fell by 4%. In the US, net revenue rose by 45%.

Admittedly, these impressive results were given a big boost by favourable sporting results. Sports wagering levels in the UK actually fell slightly, but the bookmaker’s win margin was higher than usual, boosting revenue. Management expects this to normalise over time, so today’s figures are unlikely to herald a surge in profits.

Cheap enough to buy?

I’m not too concerned by the prospect of flat profits. With the stock trading on 11 times forecast earnings, it seems priced for bad news. But with a decision due soon on the maximum stake for fixed-odds betting machines, the outlook could soon become more certain.

In the meantime, shareholders are being paid to wait with a well-supported dividend yield of 4.8%. I’d rate the shares as a buy for income at current levels.

Here’s my 7.4% yielder

If you’re looking for a higher yield, then “specialist fit” fashion retailer N Brown Group (LSE: BWNG) could offer a rare chance to lock in a 7%+ dividend yield. The group’s shares have fallen by about 20% since I last considered the stock. I’m starting to think this decline may have gone too far.

The group mainly operates online, with brands such as Jacamo, Simply Be and Figleaves. The last few years have been tough. Falling profits have caused the shares to lose more than 65% of their value from their 2014 peak.

However, there are now signs that this process has bottomed out and that the outlook may be improving. Sales rose by 3.9% to £922.2m last year, while adjusted pre-tax profit was 1.3% higher, at £81.6m.

Although the group booked exceptional costs of £56.9m last year, these mostly related to historic financial issues. The cash impact of these is expected to peak in the current year, after which the situation should improve.

A turnaround buy?

It’s worth mentioning that this company makes quite a lot of money by selling to customers on credit. In 2017/18, 29% of revenue came from financial services. I estimate the contribution to profit may have been greater than this.

This business model can be very profitable, as long as bad debt and regulatory risks are managed carefully.

Broker consensus forecasts suggest that the group’s adjusted earnings should be largely flat this year, at 22.9p per share. This should provide adequate cover for the dividend of 14.3p per share, supporting the 7.4% yield.

At the last-seen price of 193p, N Brown trades on just 8.4 times forecast earnings. I believe the shares could be a buy at this level.

The post One FTSE 250 stock yielding over 7% I’d consider buying today 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?

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.

A mixed picture

Shares of FTSE 250 omnichannel fashion retailer N Brown Group (LSE: BWNG) fell by 14% in the opening hour of trading on Tuesday, after the group issued a trading statement.

Given this reaction, you might expect news of a profit warning. But that wasn’t the case. Full-year profit guidance was unchanged and the group reported revenue growth of 3.2% for the 18 weeks to 6 January.

So what’s gone wrong? It seems that achieving sales growth has required heavy promotional spending. As a result, gross profit margins on products are now expected to fall by between 2.25% and 2.5% this year, compared to previous guidance for a drop of 0.7%-1.2%.

However, this fall in profit from retail should be offset by higher finance profits. Like a number of fashion retailers, N Brown makes a lot of its profit from customer credit.

An increase in the size and quality of the group’s loan book means that gross margin from financial services is now expected to be around 5% higher this year, compared to previous guidance for an increase of 1%-2%.

Cheap enough to buy?

I estimate that financial services are likely to provide around one third of N Brown’s total profits this year. This should help to support profit and dividend forecasts for the current year.

However, I’m concerned that profit margins on clothing may continue to weaken. I’m also unhappy at the risk that a slowdown in credit sales would result in a double hit to profits, as customers would buy less and pay less in interest charges.

Although the stock’s P/E rating of 11 and forecast yield of 5.9% might be said to look cheap, I think there are better options elsewhere in the retail sector.

One stock I’d buy

One potential example is cycle and automotive retailer Halfords (LSE: HFD). Like-for-like sales at the group rose by 2.7% during the third quarter, and are up by 1.9% for the year to date.

Halfords attracts me for several reasons. The group’s focus on cycling, car accessories and car servicing (Autocentres) has allowed it to navigate a changing market without serious problems. A strong balance sheet has also helped to maintain stable free cash flow and to support the dividend.

Although profit margins have fallen over the last five years, the group’s return on capital employed is still attractive at around 13.6%. This compares well to N Brown’s 2017 ROCE of 7.7%.

Strong returns help to generate plenty of cash, and Halfords scores well here too. The group’s shares trade on a trailing price/free cash flow ratio of 15, compared to a figure of 27 for N Brown.

Halfords cash generation underpins its dividend, which has been consistently covered by surplus cash in recent years. The group’s shares currently trade on a forecast P/E of 12, with a prospective yield of 5.1%. In my view they provide a much better quality opportunity to make money than those of N Brown.

The post One 5%+ dividend stock I’d buy today, and one I’d avoid 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.

Buy what you know? 

I’m a huge fan of ASOS myself and regularly buy clothes through the retailer. I’m a particular admirer of the £9.95 12-month next day delivery deal, which means I can order new clothes tonight, and they’ll arrive tomorrow. How easy is that?  So should I follow legendary US investor Peter Lynch’s ‘buy what you know’ investment  strategy and load up on the shares? I’m not so sure. 

Sales growth at ASOS in recent years has continued to be strong. Indeed, over the last three years, sales have surged from £769m to £1,445m, a compound annual growth rate (CAGR) of 23%. Looking forward to next week’s FY2017 results, City analysts expect sales to come in at £1,936m, a rise of 34% on last year. However, it appears that profits are not growing at the same rate as sales. For example, last year, operating profit and net profit came in at £42.1m and £24.4m respectively. Those figures are actually down from three years ago, when the company recorded numbers of £54.5 and £40.9m. Strong top line growth is not translating into increased profitability. 

Turning to the valuation, ASOS trades on a high P/E ratio of 78 at present. That kind of valuation is quite risky in my view, as it doesn’t leave a huge margin for error. So for now, I won’t be investing. 

4.2% dividend 

One retailer that does potentially offer value right now, and could also benefit from two powerful demographic trends, is ‘specialist fit’ fashion retailer N Brown (LSE: BWNG). 

It’s no secret that the UK population is getting older. According to the Office for National Statistics, 18% of the population was aged 65 or older last year, up from 15.9% a decade ago. At the same time, the population is also getting larger. According to the UN Food and Agriculture Organisation, UK obesity levels have more than trebled in the last 30 years, with one in four British adults now classified as obese. 

How can investors benefit from these trends? How about a retailer that caters for both an older and larger clientele? That’s exactly what N Brown does, as it owns brands such as JD Williams that caters for over-50 customers, Simply Be offering women’s plus-sizes and Jacamo, which offers men’s clothing in sizes up to 5XL. 

Half-year results released this morning look solid, with group revenue and online revenue rising 5.6% and 14% respectively. FX headwinds resulted in a 2% fall in EPS, however the group did maintain its interim dividend at 5.67p. Chief Executive Angela Spindler was upbeat about future prospects, commenting: “We are confident in our ability to deliver sustainable long-term growth and achieve our international ambitions.”

With analysts forecasting full-year earnings of 22p, N Brown currently trades on a forward P/E ratio of 15.5. A dividend yield of 4.2% is also on offer. On those metrics, I believe the stock could be worth a closer look. 

The post Why I’d buy this unloved 4% dividend stock over ASOS plc 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?

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.