Enter Pendragon

This is bad news for Pendragon (LSE: PDG), which sells both new and used vehicles, and offers after-sale service and repairs. Its share price crashed almost 10% today after the group unveiled a pre-tax loss of £32.2m, down from last year’s £28.4m profit, scrapped its dividend, and announced around 300 job losses. This Fool writer saw it coming.

Management admitted to a “challenging” first half as it moves to reduce its used car stock to more appropriate levels, both through “lower retail pricing and clearance through trade auction channels.” 

These necessary actions resulted in significant losses, made worse by a market-wide drop in used car values. At least the issue of stock levels has been largely addressed, management said, and it has taken measures to reduce the risk of a repeat.

Like-for-like group revenues rose by 2.9% to £2.45bn, but lower pricing ravaged profits. For example, used car revenue grew 3.7% but gross profit fell 26.1%.

Non-executive chairman Chris Chambers, who steps down on 1 October, warned that the rest of the year looks set to be challenging too. The group’s share price has now more than halved in the last year and, after five years of share price disappointment, today’s valuation of 3.9 times earnings will only tempt the bravest of bargain seekers. If we get a Brexit quick fix and avoid a global recession, Pendragon might just be worth a punt. That’s two big “ifs” though.

Auto Trader Group thrives

Not every company in the car industry is losing its grip. Classifieds advertiser Auto Trader Group (LSE: AUTO) has seen its share price accelerate 20% in the last year, as the group benefits from its market dominance and lack of a serious competitor. It remains the go-to name for those buying and selling used cars.

The lack of competition irritates many in the industry, but investors won’t be complaining, and will relish the high barriers to entry. Some say the FTSE 100 group is the motor industry’s answer to property portal Rightmove.

June’s full-year results showed both revenues and operating profits rising, the former up 8% to £355.1m, and the latter up 10% to £243.7m. The board also remains confident of meeting growth expectations, despite the challenging environment. 

Given those challenges, the £4.85bn group does look expensive at a forward P/E of 23.9 times earnings, and a PEG of 3.3. That said, its operating margins are a fat and juicy 68%, something you don’t see very often. City analysts expect earnings to grow a robust 7% this year, and 14% next. Auto Trader is clearly doing something right, Pendragon isn’t.

Conditions in the car industry are tough and look set to remain so, so I’m surprising myself by saying I reckon Auto Trader may well be a buy.

The post Got £1,000 to invest? Here’s one FTSE 100 stock I’d buy, and another I’d avoid appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader and Pendragon. 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.

Yet it appeared inevitable that Pendragon would be forced to bite the bullet and warn on profits as it did given the steady stream of industry announcements showing how new car sales are plummeting and how used car sales growth has ground to a halt.

Last week, the small-cap said that it expected to now record a “small” pre-tax loss this year, reflecting expectations that “the first-half of 2019 [will] be significantly loss making ahead of returning to overall group profitability for the second-half.”

Flying into danger

If I were a Pendragon shareholder though, the last half of that sentence would have chilled me to the bone. What chance of the retailer returning to profit in the latter half of 2019 given that the decline in new sales is worsening, if anything?

Latest data from the Society of Motor Manufacturers and Traders showed new unit sales dropped 4.6% year-on-year in May, worsening from the 4.1% annual decline recorded in April.

This correlates with some truly shocking gauges charting the health of the broader retail sector too, the freshest report from the British Retail Consortium showing total retail sales in the UK dropping at their sharpest monthly pace in May since the body began compiling records in 1995.

Obviously, big ticket items like cars are the first items to be struck from shopping lists in times of great economic upheaval and uncertainty like these. And with botched Brexit negotiations set to stretch on until the autumn at least, inflation on the rise, and signs growing of a fierce slowdown in the global economy, conditions aren’t likely to be conducive for Pendragon to return to profits in the second half, not in my opinion.

Indeed, I’m fully expecting the firm to downgrade its full-year estimates once again in the not-too-distant future.

Out of puff?

For this reason, I’m not tempted to pick up Pendragon despite it currently trading at six-and-a-half-year lows below 18p per share. A forward P/E ratio of 4.4 times suggests that its cheap, but it’s cheap for a reason. So ignore the retailer’s low valuation and its 10.8% dividend yield, I say.

One final point. It’s fun to note that the share prices of the likes of Vertu Motors, Motorpoint Group and Marshall Motor Group have remained remarkably strong despite the woeful update from their retail rival Pendragon. Investors should also be worried about some scary trading statements here too.

So, for this reason, I’m also prepared to ignore their sub-10 earnings multiples and 4%+ corresponding dividend yields, and buy other stocks instead.

The post 4 dividend stocks I won’t touch with a bargepole (like this 10%+ yielder) appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon and Vertu Motors. 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.

Today I’m going to outline two stocks that I believe are deeply undervalued and have the potential to double investors’ money over the medium term.

Dramatic recovery

Pendragon (LSE: PDG) is one of the largest car retailers in the UK. Unfortunately, this industry is currently suffering from falling demand as consumers have been putting off big-ticket purchases due to Brexit uncertainty. 

This change in sentiment has put the brake on Pendragon’s earnings growth. Underlying profit before tax fell £12.6m to £47.8m last year as total revenue ticked lower by 2.4% (a 24.3% jump in costs didn’t help matters). The good news is, for 2018, underlying earnings per share came in slightly higher than expectations at 2.8p, compared to the City’s projection of 2.6p. Analysts are expecting a slight increase next year as some one-off costs are not repeated, and on this basis, the stock is trading at a forward P/E of just 9.

Even though the company is facing some headwinds today, I do not think it is unreasonable to say that, over the medium term, earnings will recover as consumer spending returns. 

Indeed, according to figures published last year, the average age of cars on Britan’s roads is now at its highest level since the turn of the millennium. Drivers cannot put off purchasing a new vehicle forever, and when confidence returns, I expect Pendragon’s earnings to jump, possibly back to the high of 5p printed in 2015. 

If the company can achieve this target in the near term, the stock could be worth as much as 50p assuming a multiple of 10 times earnings, that’s an increase of 100% from the current level. On top of this, the shares also offer a 5.3% dividend yield.

Driving ahead

Lookers (LSE: LOOK) is another company that I think could see a dramatic recovery in earnings over the next few years. 

Like Pendragon, the car retailer is currently seeing a drop-off in demand for new vehicles as consumers put off purchases. Adjusted pre-tax profit declined 1.6% in 2018 as turnover rose 3.9%. Looking at these figures, I am optimistic that if the company can grow sales in such a hostile environment, when growth returns in the new car market, earnings could surge.

Right now, shares in the company are dealing at just 7.5 times forward earnings which, in my opinion, looks cheap even though profits are falling. For some comparison, the rest of the UK market is trading at an average forward P/E of 12.2.

Historically, Lookers’ operating profit margin has been around 56% higher than it is today, which implies that when growth returns and the group’s economies of scale start to pay off, earnings per share could potentially rise to 20p per share or more, according to my calculations (based on the City’s 2019 earnings target of 13.6p). This implies a possible capital gain of more than 100% from current levels. On top of this potential, there’s also a dividend yield of 3.2% on offer for investors.

The post Have £2k to invest? I think these stocks could double your money appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pendragon. 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 has seen its share price spike to six-month highs in recent sessions, and my Foolish colleague Harvey Jones is one of those that believes the road ahead remains an exciting one. But whil he believes that the used car market provides plenty of profits opportunities for Pendragon, I am not so sure.

That said, it is pretty cheap at the present time. Do I think it is it worth a punt?

Sales slowdown

I’ve written long and hard about the impact that Brexit-related uncertainty is having on the British auto sector. This is not the only problem facing the likes of Pendragon, though, as changes to the way lawmakers test carbon dioxide emissions (and other pollutants) from cars is also denting its profits outlook.

Indeed, in mid-October Pendragon advised that the introduction of new legislation known as the Worldwide Harmonised Light Vehicle Test Procedure “has caused significant new vehicle supply disruption which gives us cause for concern over the coming months for new vehicle sales and profitability.”

As if this wasn’t scary enough for its shareholders, the retailer followed the worrying statement with a profit warning in which it forecast full-year profit before tax of £50m, down from above £60m last year.

The market should be braced for further downgrades too, given that sales deceleration is picking up traction. Like-for-like sales at Pendragon dropped 7.2% in the three months to September, it advised, worsening sharply from the 0.9% decline punched in the first six months of 2018, with demand tanking in both the new and used car segments.

Low multiples, big yields. Is it a buy?

Right now Pendragon deals on a forward P/E ratio of just 9.9 times, caused by the expected 19% earnings decline that the City has committed to paper. That said, I’m not tempted by this low reading due to the likelihood of additional estimate slashing for the near term, as well as the probability that the anticipated 21% bottom-line rebound for 2019 will be put to the guillotine too.

In light of the worsening profits outlook, I also reckon investors should be braced for Pendragon to slash the dividend much more than is currently being forecast (a 1.4p per share reward is predicted, down from 2017’s 1.55p payment). Naturally, this means that the company’s inflation-bashing 5.3% yield holds little appeal for me either.

In fact, the news flow over the past couple of weeks has reinforced my view that the small-cap is a rock-solid sell right now. The sell-off across financial markets in recent weeks leaves plenty of dirt-cheap dividend darlings for stock pickers to pile into. Pendragon is just an investment trap in my opinion, and should be avoided like the plague.

The post Is this 5%-yielding dividend stock a brilliant bargain or just a value trap? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon. 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.

Into reverse

Car dealer Pendragon (LSE: PDG) trades at a forecast valuation of just eight times earnings after a tough time that has sent its share price crashing 40% over three years. It is down another 2.26% at time of writing after posting a 6.4% drop in group revenue in this morning’s interim management statement, or 7.2% on a like-for-like basis.

Down with a bump

Earnings from both used and new motor sales in the UK are falling, amid economic uncertainty and the demonisation of diesel, hitting Pendragon hard. The group has downgraded its annual profit guidance, blaming new global vehicle testing standards for disrupting supplies and hitting revenues.

There were some positives, with gross profit in the used car business jumping 20%, although new car profits fell 0.3% and after sales revenue was down 3.5%. Management reported signs of improved used car performance in the third quarter, and said this should be a key growth area next year.

Enter Pendragon

The damage to the share price may have been even greater but Pendragon prepared investors by warning last week that profits were in peril as new vehicle tests knocked sales. Royston Wild still reckons it can be a dream stock for income seekers with the dividend up a bumper 300% in the last five years alone. The current forward yield is 5.4%, handsomely covered 2.2 times by earnings.

While City analysts predict earnings per share (EPS) will fall 6% this year they are pencilling in 16% growth for 2019. This could be one to park in your portfolio, especially if you think Brexit and car regulatory clouds will lift next year.

Factory of fun

Cards, gifts and party supplier Card Factory (LSE: CARD) has had an even worse time of it lately, falling 50% over three years. The discount retailer is also trading at a discount, with a current valuation of just 9.4 times earnings. The dividend is even juicier than Pendragon’s with a forecast yield of 8.3%, although cover looks thin at 1.2 times earnings.

As Roland Head points out here, Card Factory paid out £164m worth of dividends in 2017 and 2018, yet during that time it was generating annual free cash flow of just £125.8m, he calculates. That kind of mismatch cannot last forever.

Card sharps

Like so many retailers, Card Factory has been hit by consumer uncertainty. Last month, it posted a drop in underlying pre-tax profit and like-for-like sales, which it blamed on extreme weather and consumer caution.

Six-monthly revenues did climb 3.2% to £185.3m, helped by new store openings and growth in the online business, and pre-tax profit jumped 17.2% to £27.2m. However, underlying pre-tax profit fell 13.9% to £22.7m. Both revenues and EPS are forecast to climb in the year to January 31 2020, so this could be a good entry point although in this case, high income equals high risk.

The post These 2 unloved dividend stocks look like unmissable bargains to me appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of Card Factory. The Motley Fool UK has recommended Pendragon. 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.

Dividends have swelled by almost 300% at the car dealership over the past five years alone. But the pressures of a deteriorating new car market mean that City brokers are expecting this starry run to come to an end.

With a meagre 2% earnings rise being predicted, they’re expecting payouts to remain locked at 1.55p per share in 2018. On the plus side, however, this reading still yields a tremendous inflation-smashing 6%.

And in better news, dividends are expected to spring higher again in 2018, to 1.6p, helped by an anticipated 14% profits improvement. As a result, the yield storms to a terrific 6.2%.

In reverse

However, I see plenty of scope for earnings — and also dividend projections — to be painfully downgraded in the weeks and months ahead. The ongoing turbulence in the British economy, and the subsequent impact on consumer confidence and spending power, is playing havoc with new car sales right now, as illustrated by latest data from the Society of Motor Manufacturers and Traders (SMMT).

The industry body recently announced that sales of new vehicles plummeted 21% in September to 338,834 units, with volumes also damaged by the introduction of new emissions testing standards. The SMMT added that, in the first nine months of 2018, sales of new cars were down 7.5% year-on-year.

Pendragon may be focussing increasingly on the used car market, but this segment is coming under increasing pressure as well.

The stock might be cheap, the firm dealing on a forward P/E ratio of 7.6 times, but I still consider it one to avoid, given the possibility of significant and sustained difficulties in the car retail market.

Yields surging close to 9%

In my opinion, a far superior stock to buy with bulging dividends is Card Factory (LSE: CARD).

The FTSE 250 greetings cards seller isn’t immune to the pressures felt by the UK high street, of course — like-for-like sales dropped 0.2% in the six month to July. And this means that an 8% earnings decline is forecast by the City for the year to January 2019.

But, unlike Pendragon and other sellers of so-called big ticket items, the revenues turbulence is unlikely to be as pronounce. And with the firm embarking on an ambitious store expansion programme, the bigger profits picture for Card Factory looks pretty rosy indeed, something which gave it the belief to pay another special dividend (of 5p per share) for the half-year period.

For the current full fiscal year, a 14.8p total dividend is forecast, resulting in a jumbo 7.8% yield. And, helped by an anticipated 4% earnings bounceback next year, a 16.5p reward is predicted which, in turn, pushes the yield to 8.7%.

At current prices, Card Factory can be picked up on a forward P/E ratio of 10.9 times. This, along with those yields, makes it a white-hot buy for serious long-term investors, in my opinion.

The post Are these cheap 6%+ yielding dividend stocks the investment opportunities of a lifetime? 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 owns shares of Card Factory. The Motley Fool UK has recommended Pendragon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

So if you didn’t notice this company hit the market, you’re not alone. And it looks as if Sabre is still failing to ignite investor interest. Over the past 11 months, the stock has barely budged. Today, the shares are trading just above the IPO price. 

Income champion

Despite what the rest of the market thinks, I believe Sabre could be a hidden income gem. The company, which operates the insurance businesses Go Girl, Insure2Drive and Drive Smart, is highly profitable and growing rapidly. Over the past four years, revenue growth has averaged 10% per annum, and net profit has increased by 21%.

But what really attracts me to the business is its income potential. City analysts believe the firm will throw off 18.6p per share to investors for 2018 and 2019, giving a dividend yield of 7.3% at current prices. Sabre has already paid out 7.2p as an interim payout and management is confident that the group is financially stable enough to offer investors a sizeable full-year payout.

Indeed, in a trading update issued today, CEO Geoff Carter said that, “having paid an interim dividend of 7.2 pence per share, the solvency capital ratio as at 30 September 2018 is at 195%, well above our target operating range of 140%-160%. This provides the board the option to return surplus capital to shareholders following the full-year results.“

This seems to hint that Sabre has the potential to reward investors with a payout that could exceed current City estimates. With this being the case, I reckon income investors should keep an eye on the enterprise. 

Cash-rich 

At first glance, car dealer Pendragon (LSE: PDG) does not seem to have much going for it. Car sales in the UK are starting to weaken, and City analysts have the group’s earnings per share sliding 12% for 2018.

However, there is more to this business than meets the eye. Pendragon has been diversifying away from its traditional business of selling cars over the past few years and is now a major retailer of software for other dealers. At the same time, the group has been growing its aftermarket sales business, where profit margins are significantly higher. 

As a result of these changes, I reckon the firm is better positioned than any of its peers to survive when the going gets tough. What’s more, Pendragon is divesting its US operations, which should eradicate the bulk of the group’s debt, improving its dividend credentials. 

Right now the stock supports a dividend yield of 6%, and the payout is covered 2.2 times by earnings per share. On top of this market-beating dividend yield, shares in the car dealer are changing hands for just 7.8 times forward earnings. 

So, if you’re looking for cheap income, I believe Pendragon is worth a closer look. 

The post Two 6%+ yielders that could give you a second income appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pendragon. 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, despite the market-leading dividend yield, I’m not interested in the company. Below I’m going to take a look at why I am avoiding this income champion.

International challenges

Vodafone’s most significant problem by far is a lack of growth. Even though the company is one of the most globally diversified businesses in the FTSE 100, the firm never seems to be firing on all cylinders. There is always at least one region that is struggling to grow.

To streamline the business, management has pushed through some significant changes over the past 12 months. These include the merger of its Indian mobile business with local rival Idea Cellular, creating the country’s biggest telecoms operator, and the merger of TPG Telecom and Vodafone Hutchison Australia. This deal will also catapult Vodafone’s business into a position at the top of the Australian market. 

Unfortunately, these changes have failed to convince investors and the City. Year-to-date, shares in Vodafone have declined around 30% excluding dividends.

Looking at the commentary from City analysts, it appears that Vodafone’s dividend policy is driving the shares lower. The company’s total dividend distribution of €4.2bn is covered by free cash flow, but when you start factoring-in rising debt and spectrum costs, the firm’s finances start to look shaky. 

Talking of debt, this seems to be another concern in the City. The total debt is approximately €40bn, that’s excluding lease obligations and other funding requirements needed to run a global telecoms business (such as upcoming spectrum payments). With all these factors to consider, City analyst have been predicting a dividend cut for some time. 

I reckon it could only be a matter of time before management acts. Competition in the global telecommunications sector is increasing, and Vodafone is having to spend more to stay ahead of its competitors. Cash flow is coming under pressure and the group is running out of options.

On the other hand, Pendragon (LSE: PDG) looks to me to be a much better dividend investment. 

The better dividend buy? 

Avoiding a global telecommunications company in favour of a car sales group might seem like an odd choice, but I reckon there are many things to like about Pendragon as an income investment. 

For a start, the stock is cheap, changing hands at just under seven times forward earnings, compared to Vodafone’s 16. The dividend yield on offer is 6.3%, below Vodafone’s 8%, but still above the market average of 3.4%. 

Further, Pendragon’s dividend payment looks much more sustainable. Even though the City is expecting a decline of 12% in earnings per share (EPS) this year, payout cover will remain above two (2.2 times to be exact). For some comparison, Vodafone’s dividend is only covered 0.8 times by EPS. 

What’s more, Pendragon’s balance sheet is rock solid. At the end of the first half of 2018, it reported net debt of £107m. The company is expecting to receive £100m from the sale of its US business in the near future, which should reduce debt to almost zero. This cash influx will allow Pendragon to buy back stock as well as returning cash to shareholders.

Considering all of the above, it looks to be the better buy to me.

The post Why I’d ignore the Vodafone share price and buy this other 6%+ yielder appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pendragon. 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 would argue that the rate at which auto sales are slumping should have produced an even larger decline, and believe that a sharp shock lower could be just around the corner.

The Society of Motoring Manufacturers and Traders (SMMT) underlined the worrying state of the new car market on Thursday with news of a 3.5% drop in new vehicle sales in June. In the six months to last month, total volumes were down 6.3% from the corresponding period last year, at 1.31m units.

It’s no surprise that Pendragon is struggling in this situation. It endured a 13.3% drop in new vehicle revenues during January-March and gross profit from new cars careered 17.6% lower year-on-year. Therefore, underlying group pre-tax profit more than halved during Q1 to £15.1m, in spite of massive cost-cutting that resulted in savings of £3.9m.

In a spin

City analysts are expecting earnings to edge 3% higher in 2018 before the rate of improvement increases to 14% next year. Pendragon may be expecting sales to pick up during the latter half of the year, thanks to weak comparatives in the corresponding 2017 timespan. I am not convinced though, given the mounting pressure on Britons’ spending power that should keep hammering car sales. Thus, a low forward P/E ratio of 7.2 times has no appeal to me at least.

I am concerned by this, as well as the impact of Pendragon’s swelling debt pile on future dividends. Sure, the car retailer may not be hamstrung by debt, but the rate at which loans have risen should make any income investor sit up and take notice. This jumped £32.4m last year to stand at £124.1m as of December.

The anticipated dividend freeze through to the end of next year, at 1.55p per share, therefore may be considered a tad optimistic. And so investors should put little faith in the company’s bulky 6.4% yield.

Out of date?

The Restaurant Group (LSE: RTN) is another big-yielding share I reckon could fail to meet lofty dividend expectations.

City brokers are expecting the Frankie & Benny’s owner to succumb to sustained earnings woes and cut the dividend in 2018 (an extra 5% profits reverse is forecast for this year). The business has kept the payout level at 17.4p per share for the past three periods, but is expected to reduce it to 16.8p.

On the plus side, the yield stands at a mighty 6%. And glass-half-full investors will also point to Square Mile predictions of a 7% earnings recovery next year, and a subsequent dividend raise to 16.9p (yielding 6.1%) as reasons to be optimistic.

Latest trading details showed like-for-like sales ducked 4.3% during the 20 weeks to May 20, keeping the relentless run of disappointing releases coming. And with the environment becoming tougher amid constrained consumer spending power and intense competition, and cost inflation adding another problem, I believe a bigger dividend reduction could be in the offing.

What’s more, a forward P/E ratio of 13.1 times isn’t that compelling either when you consider that The Restaurant Group’s turnaround strategy is still failing to fire. And the risks  for the company’s retail park-based restaurants are growing as the e-commerce boom continues. There are many other big-yielding shares with better investment potential than this one, in my opinion. Speaking of which…

The post Don’t bank on these 6% dividend yields to deliver a large retirement income appeared first on The Twelfth Magpie.

More reading

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon. 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.

Even though the company achieved underlying operating profits of £48.5m in the first half of the year, it struggled to break even in the second half of 2017. When the results for the full year were eventually released, it reported a decline in earnings per share for the year of 4.2%.

Unfortunately, analysts are expecting earnings to decline a further 14% this year, but growth is expected to return in 2019 thanks to the company’s efforts to rebuild the business around used vehicle sales, automotive after-sales services and software. 

Software sales 

Pendragon’s Pinewood Technologies is a leading software provider in the motor industry, providing dealer management software for dealerships all over the world. Even though this division is relatively small compared to the overall group, it generates a disproportionate amount of profit and is still growing steadily. Software sales accounted for less than 0.4% of revenue in 2017 but 13% of operating profit. 

That being said, even though software sales will pick up some of the slack, there’s no getting away from the fact that the firm’s income is set to fall in 2018. Still, even with earnings due to come in 14% lower, City analysts believe the group’s dividend of 1.55p per share will continue to be covered twice by earnings per share. 

Management is also trying to sell Pendragon’s US dealerships, which could fetch £100m, wiping out almost all of the company’s debt.

These figures lead me to believe that the firm’s dividend yield of 6.2% is not going to be slashed anytime soon and the stock is a steal, changing hands at just seven times forward earnings.

A great opportunity 

Another income stock that I believe is too cheap to pass up right now is Photo-Me (LSE: PHTM). 

Last month, shares in Photo-Me slumped after the company issued a profit warning thanks to slower than expected growth in one of its most important photo booth markets, Japan.

Part of the reason why the shares fell so heavily after its warning is that they looked quite expensive heading into the update. After years of explosive growth (net profit has more than doubled over the past five years), investors were expecting the good times to continue. The market was not expecting a profit warning. 

However, even though City analysts now expect to the company’s earnings per share to remain stagnant for the next two years, I believe this is an excellent opportunity for investors to snap up a high-yield share at a bargain price.

Indeed, right now shares in Photo-Me support a dividend yield of 7.1% and trade at a forward P/E of 12.6, the lowest valuation awarded to the stock since 2013. Management has already stated its commitment to the dividend following the profit warning, and with net cash of approximately £26m at the end of April, it really does look as if this market-beating dividend yield is here to stay.

The post Are these two small-caps the cheapest high yield stocks around? appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Pendragon. The Motley Fool UK has recommended Pendragon and Photo-Me International. 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.