If you own shares in good businesses and don’t need the money for a few years, there’s usually no reason to worry. Holding your nerve can be tough, though.

In my experience, one thing that makes it easier to sit tight in volatile markets is a reliable dividend. Receiving regular cash payments in your bank account is a useful reminder that the business in which you’re invested is still operating as usual, regardless of what’s happening in the stock market.

Today, I’m going to look at two dividend stocks with yields of about 6% that I’d be happy to buy today.

Walking ahead of the market

Budget footwear retailer Shoe Zone (LSE: SHOE) gained around 10% this morning after announcing that profits for the year ending 30 September would be ahead of expectations. Strong sales, and the closure of loss-making stores, means that management expects pre-tax profit to be “in excess of £11m”, compared to £9.5m last year.

The group’s year-end net cash balance was £15.7m, £4m of which will be used to fund a special dividend for shareholders next year. I estimate this to be worth 8p per share, equivalent to a 4% dividend yield, on top of the stock’s regular yield of 5.6%.

Skilled operators

It’s worth point out that although this firm’s brand is associated with the cheap end of the market, its operations and financial performance suggest expert management to me.

By operating a store estate with low fit-out costs and short leases, the company has avoided being lumbered with costly loss-making stores.

By sourcing most of its own stock directly from factories overseas, Shoe Zone generates an impressive return on capital employed of around 25%.

By maintaining a debt-free balance sheet, strong cash generation is fed back directly to shareholders. Perhaps this is no surprise — 50% of the shares remain in the hands of directors Anthony and Charles Smith.

After today’s gains, I estimate that the stock trades on about 10.5, with an ordinary dividend yield of around 5.7%. I’d buy.

A 6% yield from the FTSE 100

If your focus is on big-cap stocks, then you might be interested in FTSE 100 motor insurer Admiral Group (LSE: ADM). This company has made a name for itself with investors thanks to long-term growth and generous special dividends in most years.

Like Shoe Zone, I believe Admiral’s execution of its business model is superior to some of its rivals.

The group partners with other insurance firms to share the risk on its customers’ policies. Doing this reduces the amount of capital Admiral needs to set aside to meet potential claims.

In turn, this means that the firm generates a lot of spare cash and a very high return on equity — a key measure of profitability for insurers.

Last year for example, the group’s full-year dividend represented 97% of earnings per share. Admiral’s return on equity for 2017 was 55%, which is roughly double the return earned by rivals Esure and Hastings.

Admiral’s share price has pulled back from recent highs of more than 2,100p. At about 1,950p, the stock trades on 16 times forecast earnings with a yield of 6%. I’d be a buyer at this level.

The post Two 6% dividend stocks I’d buy ahead of a FTSE 100 rebound 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.

When people discuss dividend stocks, they tend to think only of big blue chip names. Many investors simply don’t associated small-cap stocks with dividends. But with a great deal of smaller companies punching above their weight on the income front, now may be the right time to consider small-cap dividend stocks for their attractive yields.

Telford Homes

Housebuilders are big dividend payers, with the sector offering an average prospective dividend yield in excess of 7%. Large-caps in the sector tend to offer more income, but many of the smaller rivals have stronger dividend cover and better growth prospects.

One small-cap housebuilder which particularly stands out to me is Telford Homes (LSE: TEF). Amid a slowing housing market, the London-focused residential property developer is bucking the trend.

The company’s financial performance is going from strength to strength. Last year, Telford’s pre-tax profits increased 35% to £46m, well in excess of original market expectations. Meanwhile, revenues increased to a record high of £316.2m, while the company reported a strong improvement in adjusted operating margin of 3.3 percentage points, up to 16.7%.

Growth

Looking ahead, management reckons Telford is well placed to deliver pre-tax profits exceeding £50m for the year to 31 March 2019, representing a 100% increase over four years. With such confidence, Telford raised its dividends for the full year to 17p a share, giving its shares a current yield of 4.1%.

Although the current yield pales in comparison to its sector peers, there’s considerably more potential for dividend growth with the company. Not only is its payout ratio significantly smaller than its rivals — at just over a third of its earnings, but future earnings are currently forecast to climb faster.

Build to rent

Moreover, Telford’s meaningful and growing exposure to the nascent build-to-rent market means its earnings ability should be less volatile than that of its sector peers. On build-to-rent contracts, the company benefits from forward funding, which reduces the amount of its own equity used during construction, enabling it to earn a much higher return on capital.

Although this comes at the cost of lower gross margins, due to savings in selling expenses and interest costs, greater exposure to the build-to-rent market should help it to weather the slowing housing market better than many of its rivals.

Shoe Zone

Elsewhere, I reckon Shoe Zone (LSE: SHOE) is another small-cap dividend stock to consider. At its current share price, the discount retailer offers income investors a prospective dividend yield of 6.2%.

Consumers may be abandoning the high street in favour of online shopping, but one area which is proving more resilient than most is the discount segment of the retail market. Keeping that in mind, shares in Shoe Zone, the UK’s leading value footwear retailer, have outperformed many of its sector peers with a gain 11% over the past 12 months, against the general retailer sector’s 8% dip.

Sure, the footwear retailer isn’t immune to structural issues affecting the sector — revenues have slipped for three consecutive years. But things appear to be stabilising, with revenues in the six months to 31 March growing by 1.1% to £73.7m. On the cost front, rents on renewals fell on average by 22%, giving it a full year saving of £100,000. And what’s more, with the balance sheet in a net cash position, Shoe Zone has the financial flexibility to maintain payouts for quite some time.

The post Looking for income? These small-cap dividend stocks offer yields up to 6.2% appeared first on The Twelfth Magpie.

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Jack Tang 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.

My big mistake came at the start of this year, when I got cold feet and decided to sell. I made a fair profit, but the company’s financial performance since then has convinced me that I sold too soon.

Today’s second-quarter sales figures are a case in point. Next’s online sales rose by 12.5% during the 12 weeks to 28 July. This was enough to offset a 5.9% fall in store sales, and boost total brand sales by 2.8%.

The company said that the long spell of hot weather meant that it’s “almost certain” that some summer sales were pulled forward from August. So there’s a risk that second-half sales will suffer as a result.

This cautious assessment is probably why the Next share price is down by 7% at the time of writing. But management has a tendency to take a conservative view in sales forecasts. I think there’s a good chance that second-half sales will be better than today’s gloomy sell-off suggests.

It’s not too late to buy

Next shares have risen by 38% over the last year. But I don’t think it’s too late to buy.

The firm has a clear plan to manage the shift from store sales to online. And last year’s operating margin of 18.7% shows that this remains a very profitable business.

Free cash flow remains strong and the company has already spent £300m on share buybacks in 2018. Management said that this should increase 2018/19 earnings per share by 4.7%.

After today’s fall, the shares trade on 12.8 times forecast earnings with a 2.9% dividend yield. That looks decent value to me.

What about this 5.9% yielder?

Next’s dividend yield has fallen over the last year as the share price has risen and the board has used surplus cash for share buybacks instead of special dividends.

If you’re looking for a retailer with a higher dividend yield, one stock I’d consider is budget footwear chain Shoe Zone (LSE: SHOE).

This business has a significant element of owner management with brothers Anthony and Charles Smith occupying two key board roles and owning 50.01% of the firm’s shares.

Although the Smiths’ majority stake means that minority shareholders have little control over the business, both men have worked for the company for at least 20 years. In my view, their management so far suggests that they have worked hard to create value for all shareholders.

Why I’d buy

Two things particularly attract me to this stock. The group’s sector expertise and niche focus allows them to buy stock directly from manufacturers overseas. This results in an unusually high gross margin of 60% and a very respectable operating margin of 6.6%.

The company also benefits from a fairly low-cost and flexible store estate. This means that it’s not stuck with lossmaking stores on long leases, unlike some larger retailers.

Although profits are expected to be broadly flat this year, my view is that the stock’s forecast P/E of 11 and dividend yield of 5.8% are cheap enough to reflect this low growth. I rate this as a small-cap dividend buy.

The post Don’t repeat my big mistake with the Next 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.

Despite being one of the many millennials that rarely watch broadcast TV, I’m prone to believe ITV’s current price may be too good to pass up. This is largely because the company has done very well over the past few years to lessen its reliance on cyclical advertising revenue by producing more of its content in-house to both use and sell overseas. In the first six months of 2018, of the group’s £1,593m in revenue, a full £803m came from the studio division.

It’s this studio division, which produces hits such as Poldark and Love Island, that is the likely future of the group as content producers are finding their properties in fast-increasing demand from distribution platforms like Netflix and Sky that can supply their customers with essentially limitless amounts of content.

This is clear in the group’s H1 results, when revenue from the studio division leapt 16% while total advertising revenue grew a more modest 2%. And while the studio division offers lower margins, it clearly offers better long-term growth potential than broadcast TV and is far less cyclical.

But for now, the combination of high growth from the studio division and very high cash flow from the broadcast and online advertising division makes a compelling formula for investors. In H1 these two divisions generated  £375m in EBITA, which was more than enough to support the high dividend payouts while keeping net debt low at £1,034m. With high cash flow and growth opportunities, I think long-term investors would do well to consider ITV and its huge dividends.

A retailer to bet on? 

One even higher-yielding stock I’ve been eyeing is discount footwear retailer Shoe Zone (LSE: SHOE), which currently offers investors a 6.12% dividend yield. Of course, a yield this high suggests a certain amount of caution needs to be exercised. In Shoe Zone’s case this is warranted since the group is being buffeted by general turmoil affecting the retail sector as well as rising import costs due to the weak pound.

Shoe Zone’s management team, which incidentally owns just shy of half of the company’s outstanding shares, has responded to these problems with a responsible strategy of maximising cash flow and slimming its estate down to just the most profitable stores. In the six months to March, this meant the group closed 10 small, unprofitable stores and opened four larger, much more profitable big box stores while maintaining a net cash balance sheet. 

This helped drive revenue up 1.1% to £73.7m with pre-tax profits tripling to £1m. This worked out to earnings per share of 1.7p while management increased the interim dividend slightly to 3.5p. But this isn’t a danger sign since the seasonal nature of its business means full-year earnings were comfortably covered by earnings last year and should be once again this year.

Certainly, the company doesn’t have fantastic growth prospects but with its great dividend, even modest growth could mean the company’s current valuation of 10.8 times forward earnings could be a relative bargain.  

The post Is FTSE 100 mega-yielder ITV simply too cheap to ignore? 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 owns shares of and has recommended Netflix. The Motley Fool UK has recommended ITV. 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 troubled retailer’s shares were down by 8% at the time of writing, after it revealed a 52% fall in half-year profits and a 51% dividend cut.

Like-for-like sales fell by 2.2% during the period, although this decline was made worse by snowy weather which forced the closure of nearly 100 stores in March.

You can’t blame the weather

Chief executive Sergio Bucher admits that the UK retailer sector “is undergoing profound change”. He’s hoping that the group can adapt to this new reality by boosting internet sales and redeveloping stores as social destinations, with a focus on fashion, beauty and food and drink.

Mr Bucher may yet succeed. But he’s going to have to spend a lot of cash first.

The group’s turnaround plan, Debenhams Redesigned, is now expected to incur cash costs of £50m, nearly double previous forecasts of about £28m.

Revamping stores, upgrading websites and restructuring warehouses are all necessary, but they cost money. Planned capital expenditure has been cut from £150m to £140m for this year, but that’s still higher than the roughly £125m spent in each of the last two years.

Net debt is expected to reach £300m-£320m by the end of September 2018, up from £275.9m in 2017. The group’s borrowings are starting to look a little high to me, given the weak outlook for profits.

The elephant in the room

However, the biggest problem may be the group’s large and long-leased store estate. The average unexpired lease length is 18 years. This makes it very costly to shut shops, some of which the firm admits are too large.

I think it’s too soon to write off Debenhams. But I believe shareholders face some serious risks.

The stock has now fallen by almost 90% since 2006. And although the shares might look cheap on six times forecast earnings and with an estimated yield of 4%, I believe there could be worse to come. This retailer remains a sell for me.

A 7% yielder I would buy

One stock that’s on my own watch list to consider buying is budget footwear retailer Shoe Zone (LSE: SHOE).

Cheap stores, short leases and low costs mean that the group’s pile-it-high, sell-it-cheap approach generates a lot of spare cash. It’s also easy for management — led by founders Anthony and Charles Smith — to shut underperforming stores without big exit costs.

A cash machine

This firm’s shoes won’t be to everyone’s taste. But it’s a very profitable business. Shoe Zone’s operating margin last year was 6.2%, double Debenhams’ reported figure of 3.1%.

Low costs and the firm’s policy of dealing directly with shoe manufacturers mean that the returns on money invested in this business are high. Return on capital employed (ROCE) was 24% last year, a figure that’s consistent with previous years.

The Leicester-based firm maintains a net cash balance and returns most of its free cash flow to shareholders each year. The shares currently trade on a forecast P/E of 9.1, with a covered forward yield of 7%.

At this level, I believe Shoe Zone stock could be worth buying.

The post One bargain 7% yielder I’d buy today and one I’d avoid appeared first on The Twelfth Magpie.

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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?

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.

Payout boost

Redrow has continued its record of cash returns today, hiking its interim dividend by 50% after completing a record number of homes during the first half of its financial year. 

According to the group’s interim figures, which were published this morning, profit before tax in the six months to December 31 increased by 26% year-on-year and revenue expanded 14% from £739m to £890m as the firm completed more units for sale and sold these at higher prices. 

Legal completions in the period rose 14% to 2,811 while the average selling price hit £330,000 from the £303,000 in the year-ago period. With cash flowing into the company’s coffers, Redrow was able to pay down £38m of debt during the six month period, reducing net debt to £35m. Management does expect a small increase in net debt during the second fiscal half, but the balance sheet can easily accommodate this with gearing of just 3% at the end of 2017.

With profits booming and debt contracting, management has decided that it’s time to return more cash to investors. A 50% increase in the interim payout has been announced today to 9p per share, beating City forecasts, which were initially calling for a payout hike of 31%. If management goes on to increase the full-year payout by a similar amount, according to my calculations, the stock now supports a forward dividend yield of 4.2% with the payout covered more than three times by earnings per share. 

And as well as this attractive dividend yield, according to current City forecasts the shares trade at a forward P/E of 7.2, although considering today’s numbers, I wouldn’t be surprised if analysts revise their growth forecasts higher in the months ahead.

Put simply, if you are looking for a cheap dividend stock with growth potential, Redrow ticks all the boxes.

Beating the competition

Another division champion I’m positive on the outlook for is Shoe Zone (LSE: SHOE). Shares in this footwear retailer have come under pressure over the past 12 months due to investor concerns about the state of the retail sector in general.

So far, it seems as if these concerns are overblown. At the beginning of January, the firm reported that revenue for the 52 weeks to September 30 had remained relatively constant and the most significant headwind was adverse foreign exchange movements. City analysts expect these headwinds to abate this year with earnings per share growth of 5% pencilled in for fiscal 2018. 

This growth should underpin the firm’s dividend payout which is currently 10.5p per share giving a dividend yield of 6.3% at current prices. What’s more, the payout is backed up by nearly £12m of cash on the balance sheet. Last year this total distribution cost the company £9m, easily covered by the £11m in cash generated by operations.

So once again, if you’re looking for a cash-rich dividend champion to add to your retirement portfolio, I believe Shoe Zone certainly deserves a second look.

The post 2 retirement dividend stocks yielding up to 6% I’d buy today appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Redrow. 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 stealthy 6% yield

AIM-listed Shoe Zone (LSE: SHOE) is a budget retailer focused on the cheap end of the shoe market.

Shares in this Leicester-based firm edged higher on Thursday, after it said sales had fallen by 1.2% to £157.8m last year due to the closure of lossmaking stores.

And although pre-tax profit fell by 7.3% to £9.5m as a result of exchange rate losses, the market seemed reassured by net cash of £11.8m and an unchanged final dividend of 6.8p. This leaves the payout for the full year at 10.2p, giving a yield of 6.3%.

Why I like this business

One of the reasons I like Shoe Zone is that its chairman and chief operating officer, Anthony and Charles Smith, own 50.01% of the shares. Although this gives them control of the company, it should also mean that their interests are aligned with those of other shareholders.

A second attraction is that almost 85% of footwear is ordered directly from overseas factories, cutting out the middleman. This boosts the firm’s margins and gives it greater control over quality and design.

Short leases mean that the group’s store portfolio is flexible and benefits from falling rental rates on lease renewals.

A final attraction is that this business has consistently generated a return on capital employed (ROCE) of more than 22% since its flotation. That’s high by any standards, and is one of the main reasons why cash generation (and dividends) are so strong.

Of course, this stock isn’t without risk. Growth rates have been very low since flotation and currency headwinds are expected to remain a problem. But these risks are already reflected in the share price, in my view.

With the shares now trading on 10 times forecast earnings and offering a 6.3% yield, I’m seriously considering buying a few for my own portfolio.

Earnings could rise by 21%

Shoe Zone’s low rating may be a result of weak growth. But no such excuse applies to technology recruitment and outsourcing group Harvey Nash Group (LSE: HVN). Analysts expect earnings at the firm to rise by an impressive 21% in 2017/18, and by a further 22% in 2018/19.

Why then does the stock trade on a 2018 forecast P/E of 8.1? One reason may be that the market is not convinced that the group’s profits will be sustainable. That’s a valid concern, given hiring headwinds in the UK, which with Ireland accounts for nearly 40% of fee income.

A second risk is that the firm’s first-half earnings were a little mixed. Although revenue rose by 9.2% to £425m, excluding exchange rate effects, underlying pre-tax profit was only 1.8% higher, at £4m. Net debt has also risen due to acquisitions.

I’m optimistic

Analysts covering the stock have upgraded their profit guidance three times over the last year. I’m prepared to trust management guidance that performance will be stronger during the second half of the year.

With the stock trading on a P/E of 8 with a prospective yield of 5%, I believe Harvey Nash could still be a rewarding buy.

The post 2 ‘secret’ small-cap dividend stocks I’d buy for 2018 appeared first on The Twelfth Magpie.

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Roland Head owns shares of Harvey Nash Group. 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.

Shoe Zone declared that it had “traded well in the second half of the year,” meaning that revenues for the full year ending September should clock in at £158m, albeit down from £159.8m in the prior fiscal period.

The Leicester-based business said that this reverse reflected the continued closure of lossmaking stores. Shoe Zone closed 35 during the period but opened 21, six of which were of the much-vaunted ‘big box’ variety, meaning the company ended the period with 496 stores.

And the shoe specialist plans to open another 10 gigantic stores in the current year.

Costs remain a concern

On the surface, Shoe Zone’s position at the value end of the market, allied with the heavy investment it has made in its digital operations, should be reason for investors to be optimistic over its earnings picture.

But I am afraid the spectre of those rising costs is adversely colouring my take on the retail giant. Indeed, Shoe Zone noted again that “foreign exchange headwinds… continued through the second half,” and these troubles are unlikely to abate any time soon.

The City is expecting Shoe Zone to record a 6% earnings slide for fiscal 2017, and while a 4% rebound is predicted for the present year, I reckon hopes of a bottom-line bounce-back could recede in the months ahead, making a forward P/E ratio of 9.8 times somewhat redundant.

Dividend hunters may still be drawn in, however, attracted by a monster yield of 6.6% for this year (a payout of 10.6p is currently predicted by the number crunchers). But I reckon the possibility of earnings disappointment in the near term and beyond still makes it an unattractive selection.

Cut-price colossus

While Associated British Foods (LSE: ABF) may not be packing the sort of dividends forecast at Shoe Zone — a reward of 46.2p per share for the current year yields a modest 1.4% — I am much more confident about its investment outlook for the present and future.

Sales at the Primark owner continue to go from strength to strength, with takings at its British shops rising 9% in the 40 weeks to July 24 as it grabbed market share, according to the most recent trading statement. And the expansion drive both at home and abroad offers up plenty of additional growth opportunities — indeed, trading at its new stores opened in Europe, the US and the UK in the year to date was described as “good.”

So it comes as little surprise that earnings at the FTSE 100 star are expected to keep on surging. A 10% rise is predicted for the 12 months ending September 2018 by analysts, and while this results in a conventionally-expensive forward P/E rating of 24.4 times, I reckon Associated British Foods’ exciting Primark expansion strategy — allied with the improving momentum at the company’s other divisions — makes it worthy of a princely premium.

The post Why I’d sell this dividend dud to buy this FTSE 100 star appeared first on The Twelfth Magpie.

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Accrol also has the benefit of a very straightforward business model as it imports reels of paper in bulk and then converts them to toilet roll, kitchen roll and facial tissues at its Blackburn manufacturing plant. The company produces some own-brand products but the vast majority of its output is private label goods for major retail chains. Its core customer base includes discounters, which has kept growth high in recent years as they have taken market share from the big four grocers.

With over 50% market share in the discount space, Accrol is far and away the largest player in this growing market and is rapidly expanding its manufacturing facilities to keep up with this growth. In the year to April revenue rose 14.2% year-on-year (y/y) to £135.1m and EBITDA increased 6.8% to £16.1m

Increasing cash flow and year-end net debt of just £19m allowed management to both invest in new warehousing and production facilities as well as increase shareholder returns. Full-year dividends totalled 6p and were covered twice by adjusted earnings per share of 12p. At its current share price this works out to a 4.3% dividend yield.

On top of this very nice dividend the company’s shares trade at just 11.9 times forward earnings. Although the company’s profitability is exposed to global movements in paper reel pricing, this valuation looks quite attractive given the group’s solid growth prospects, healthy balance sheet and high income potential.

Higher risk, but higher reward?

For more risk-hungry investors, discount retailer Shoe Zone (LSE: SHOE) may present an intriguing option. The company’s shares are currently valued at just 9.8 times forward earnings and last year’s regular dividend of 10.1p represents a whopping 6.4% yield. In addition to the regular dividend there was also a special dividend of 8p that management intends to repeat whenever year-end cash balances exceed £11m.

The risky part of investing in Shoe Zone is that aside from facing the same sector-wide challenges as other retailers, the company is executing a strategy of shrinking to grow profits. This involves closing small, low-margin stores and opening up a smaller number of big box stores that cut down on rental, staffing and logistics costs. On top of this, management is also pushing to increase margins by directly sourcing product straight from overseas factories.

In the half to April the year-end store count fell from 518 to 504 y/y as part of this plan as the company closed small and medium-sized stores to trial new big-box outlets that are trading very well and will be rolled out across the estate. However, this did lead revenue to fall from £74.6m to £72.9m y/y although gross margins improved a full 170 basis points to 62.8%.

During this period the weak pound did cause underlying pre-tax profits to fall from £1.7m to £1.3m y/y but analysts still expect full-year earnings to more than cover dividends payouts. Shoe Zone is a risky income option but yield-starved investors who aren’t risk-averse may find it worth digging into.

The post 2 dirt-cheap dividend kings 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.

So why am I bearish on the stock? A quick scan of today’s interim results should help to explain.

Profits tumble

In the six months to 1 April, sales at the Leicester-based, £94m cap dipped from £74.6m to just under £73m. More concerningly, pre-tax profits nosedived to just £300,000 compared to £1.9m over the same period in 2016. Much of this can be attributed to the fall in sterling following last June’s shock referendum result and an overhaul of its store estate. 

Nick Davis, CEO of Shoe Zone, did his best to put a positive slant on today’s numbers, stating that the impact of sterling’s fall would be “significantly reduced” going forward and that trading since the period end had been in line with management’s expectations. He also remarked that the company’s trial of its Big Box store concept had performed well and that the rollout would be accelerated over the rest of the year. A target of 10 such stores by the end of 2017 was set. A 24% rise in sales of Shoe Zone’s non-footwear range was also encouraging.

Based on early trading, however, the market isn’t convinced. At the time of writing, shares in Shoe Zone are down just over 5% to 178p. 

Aside from today’s poor numbers, I think there are other reasons to avoid the retailer. For one, operating margins will always be stubbornly low for this kind of business. Moreover, analysts are only forecasting a 2% rise in earning per share in the next financial year, making shares in Shoe Zone look far less like the bargain they first appear to be.

A better fit for your portfolio?

Shoe Zone’s competition must also be considered. The idea that shoppers would prefer to visit its stores when other budget retailers — such as Primark — have sites in better locations and far wider product ranges is hard to fathom. Indeed, I suspect that investors wishing to profit from those offering low-cost clothing and footwear are better off looking at the latter’s owner, Associated British Foods (LSE: ABF).

In addition to its diversified portfolio (featuring businesses in segments such as sugar, agriculture, grocery and ingredients), the £24bn cap’s presence in 50 countries means it also offers the kind of international footprint that Shoe Zone lacks. The company has a 17% earnings per share rise pencilled in for the current year with a further 9% rise expected in 2017/18. Boasting excellent free cashflow and a £190m net cash position as of April, this is one retailer that should remain resilient if retail spending to continues to drop as a result of rising inflation and slowing wage growth. If anything, I think Associated British Food offers far more protection for investors than most as consumers begin to tighten their purse strings.

Sure, the dividend yield is negligible (1.4%) and a price-to-earnings (P/E) ratio of 25 for 2017 will put some investors off completely. Nevertheless, when compared to Shoe Zone, I think Associated British Foods looks a decidedly less risky pick.

The post Dirt cheap and offering big dividends. So why am I shunning this small-cap? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• 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?

Paul Summers 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.