A smaller operation with plenty of potential

In an article in March 2018, I wrote: “When I think of Stock Spirits, I dream of it growing to become the next Diageo.” And who knows? Maybe one day the firm will expand beyond its operating geography of Central and Eastern Europe. But I maintain my view that it will probably be a long time before the firm’s brands challenge Diageo’s across the world. For example, you may not have heard of Stock, Fernet, Limonce, Zoedkowa, Saska, Keglevich and Zoedkowa, yet one day, some of those brands could become household names everywhere.

For now, Stock Spirits describes itself as “one of Central and Eastern Europe’s leading branded spirits and liqueurs businesses,” offering a portfolio of products that are “rooted in local and regional heritage.” The firm’s core operations take place in Poland, the Czech Republic, Slovakia, Italy, Croatia and Bosnia & Herzegovina. On top of that, the company reckons it exports to more than 50 other countries worldwide and global sales volumes exceed 100m litres per year. Indeed, the firm is no micro-business with the market capitalisation running close to £478m. Although that’s a long way from Diageo’s more than £77bn, an optimist might say the size difference just underlines Stock Spirits’ potential.

Trading well with moderate growth

Most of the numbers in today’s half-year results are moving in the right direction and I can sum up the report by saying that trading appears to be going well with “continuing financial and operational progress.” Operational highlights in the period include market share growth in Poland and the Czech Republic, and the signing of an agreement to acquire Distillerie Franciacorta, which is a “leading grappa business in Italy.” The firm expects to pay €23.5m for it and “a further €3m for land.”  The deal should complete in June. Post-period, Stock Spirits has also agreed to acquire Bartida, which is a “high-end on-trade spirits business in the Czech Republic.” That deal will cost an initial €7.3m with additional deferred consideration of “up to” €3.7m over five years.

Other than being keen on the sector for its generally defensive and cash-generating qualities, I have no special insight into Stock Spirits’ business. But it’s just the kind of share I like to buy and tuck away for the long term to see what happens. The valuation is certainly lower than Diageo’s. At the recent share price of 231p, the forward-looking price-to-earnings rating runs at just over 13 for the trading year to September 2020 and the anticipated dividend yield is around 3.7%. I think that’s fair and the share has potential.

The post Why I’d buy this share alongside premium drinks supplier Diageo appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any share 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.

Branded spirits and liqueurs company Stock Spirits Group (LSE: STCK) proved to be a great investment for shareholders during 2017. The shares rose around 56% to trade at today’s level close to 279p, but the firm still displays attractive metrics for quality, value and momentum, and I believe the stock warrants close attention now.

Today’s full-year results are encouraging. Constant currency revenue rose 3% during 2017 compared to the year before and adjusted basic earnings per share shot up more than 14%. In a sign that cash inflow backs profits, net debt closed down 11% for the year at just over €53m. The directors displayed their confidence in the outlook by pushing up the total dividend by almost 5%.

It’s all about brands

The firm offers a portfolio of products in Central and Eastern Europe that “are rooted in local and regional heritage.” Core operations cover Poland, the Czech Republic, Slovakia, Italy, Croatia and Bosnia & Herzegovina, but exports also go to more than 50 other countries around the world. Something is going right because sales volumes increased by 6.5% in 2017 and global sales volumes total more than 100m litres per year. 

When I think of Stock Spirits, I dream of it growing to become the next Diageo, and chief executive Mirek Stachowicz said in today’s report that after a strategic review the directors aim to focus more on its brands “to keep pace with the changing needs and tastes of our end consumers.” The idea is to “premiumise” the brands so that they become “more relevant to millennials.”  Planned tactics to achieve that include investing in digital marketing and adding new brands via carefully selected acquisitions.

A focus on brands is certainly what made Diageo mighty, but Stock Spirits may have a fair distance to travel if it is to expand its trading footprint further with its brands such as Stock, Fernet, Limonce, Zoedkowa, Saska, Keglevich and Zoedkowa. For now, the firm’s stated goal is to “become Central and Eastern Europe’s leading spirits business.”  Much of 2017’s share-price progress seemed to be driven by a recovery that the company engineered in its operations in Poland. With that recovery in place, I agree with Mr Stachowicz’s comment that Stock Spirits is now “well positioned to achieve sustainable long-term growth.”

Simplification of operations

Meanwhile, full-year results from bio-decontamination and containment equipment manufacturer Bioquell (LSE: BQE) confirmed that the growth story remains on track for the firm. Since January 2017, the stock is up around 130%, driven by an impressive recovery in earnings.

During the year, the firm sold its airflow service business to concentrate on its core bio-decontamination operations, which now provide the majority of revenues. There is a residual business in the area of defence, but the directors expect the full benefits of an increased focus on bio-decontamination to show up in the results for profit during 2018.

I think that concentrating on a narrow area of operations is almost always a good thing and expect Bioquell to deliver growing profits in the years ahead. Executive Chairman Ian Johnson told us in today’s report that the company has invested in sales and marketing to “maximise” its potential in the international Life Sciences and Pharmaceutical market.

The post 2 ‘secret’ growth stocks to watch right now appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

Stock, which produces spirits and liquors sold across Central and Eastern Europe, said overall trading since half-year results were announced in August, and therefore for the full-year ended 31 December, was slightly ahead of expectations.

The small-cap said that in Poland and the Czech Republic — which provide more than three-quarters of group sales — both volumes and values continue to rise, the company quoting researcher Nielsen’s data of November.

Risky business

The solid market conditions the firm speaks of are being celebrated by the market right now, and this has fuelled its 70% share performance improvement since the beginning of August.

And in theory the prospect of strong economic growth in the emerging economies of far-flung Europe should keep driving drinks demand, and with it Stock Spirits’ earnings, higher in the years to come.

But I remain less than convinced by this argument as key markets like vodka remain in a state of structural decline as modern drinkers opt for alternative tipples. And Stock’s position in its key territories also remains under pressure from intense competition.

So while the business has engaged in massive cost-cutting programmes and diversification into new product areas to combat these problems, the risk to it posting strong and sustained profits growth remains high.

City analysts are predicting that the business will follow an anticipated 19% earnings improvement in 2017 with an 8% rise in the current year. However, current forecasts leave the company dealing on a forward P/E ratio of 18.2 times. And this is too high in my opinion given the amount of hard work it still faces to keep sales on an upward trajectory.

Take a sip

I would instead be far happier pouring my investment cash into Majestic Wine (LSE: WINE), even if the broader retail environment in the UK is likely to remain challenging for some time yet.

The wine-seller also updated the market on Tuesday, advising in a cheery festive report that underlying sales leapt 4.1% in the 10 weeks to January 1. AIM-quoted Majestic generates almost a third of its annual sales at Christmas so today’s update clearly bodes well for full-year numbers.

Investors should beware that its hard work to get drinkers flocking back through its doors is not expected to light a fire under earnings just yet. Instead, a 1% bottom-line reversal for the 12 months to March 2018 is currently anticipated by City brokers, a situation which would represent a fourth successive annual dip if realised.

But I am confident the measures it has undertaken to improve its retail operations should create healthy profits growth further down the line. And I am not alone, the Square Mile anticipating it to finally fire back with a 19% earnings improvement in fiscal 2019.

Despite its elevated forward P/E ratio of 26 times, I believe the huge sums it has invested to bolster its international footprint, not to mention improve the customer experience in its UK market, should lay the groundwork for healthy growth in sales ahead, and thus Majestic Wine is deserving of such a fruity premium.

The post 1 turnaround stock I’d buy in 2018 appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Stock Spirits — which sells alcoholic products primarily in Central and Eastern Europe — announced that total revenues edged 3.3% higher during the six months ending June, to €119.8m. This result helped propel operating profit 32% higher, to €16.5m.

The drinks giant saw total sales volumes rise 7.3% year-on-year, to 5.7m nine-litre cases. But cost-cutting initiatives introduced last year also played a big part in bulking up the bottom line, with savings of €2.5m chalked up in the first half.

Chief executive Mirek Stachowicz commented that “this performance is a clear sign that the business has stabilised and that the initiatives put in place in 2016 are beginning to deliver tangible results including in Poland.”

He added: “While our core markets remain competitive, we believe that our strategy of further developing our existing brand portfolio whilst continuing to invest in markets and categories with strong potential leaves us well placed to continue delivering long-term and sustainable growth.” 

Not out of the woods

Stock’s latest results pay testament to the hard work it has carried out to jump-start its ailing fortunes. But today’s release still highlighted the problems in some of its territories.

Although price-cutting allowed it to grow revenues and its market share in Poland, drinkers’ appetites for vodka continue to wane. The company explained that while “the overall vodka market in Poland remains in positive growth, [this is] at a lower rate than during 2016.”

Elsewhere, the Buckinghamshire business noted that “the modest growth in the Italian spirits market in 2016 has continued into 2017.”

The City currently expects the firm to endure a 7% earnings fall in 2017, although a 4% rebound is predicted for next year. Still, I would not be tempted to pile in on the hopes of a prolonged recovery given that competition is likely to remain intense, and changing consumer tastes are putting the boot into total vodka sales.

And I reckon a forward P/E ratio of 15.8 times looks a tad lofty given these challenges.

Build a mint

Those seeking stocks with robust growth outlooks would be better off checking out Bovis Homes Group (LSE: BVS), in my opinion.

Just as at Stock Spirits, the number crunchers expect the housebuilder to endure some earnings woe in the immediate term. The 15% bottom-line decline currently predicted reflects its decision to scale back near-term production targets as it prioritises quality over quantity.

But thanks to the strength of the British housing market, this is likely to prove a temporary phenomenon, with supportive lending conditions and a chronic homes shortage keeping property values afloat. As a consequence, the City is expecting earnings to roar 17% higher in 2018.

And current forecasts make Bovis brilliant value for money, a consequent forward P/E rating of 13 times falling below the broadly-considered value benchmark of 15 times. When you also throw a dividend yield of 4.6% into the equation, I reckon the FTSE 250 star deserves serious attention right now.

The post I’d sell Stock Spirits Group plc and buy this bargain-basement stock instead appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

First off, the situation that caused the profit warning, increased competition in the Polish vodka market, is still present. But the situation appears to have stabilised. In its Q1 trading statement the company reported its market share was steady at around 25%, even as the market shrank by around 1% year-on-year (y/y). This is important as Poland is its largest market so any negative events there are felt dearly on the income sheet.

Elsewhere, the company’s turnaround plan under a new CEO is making progress with cost-cutting expected to trim €1.5m annually from back office costs by next fiscal year. And a slew of new distribution agreements have been signed with major global liquor brands while plans to begin exporting own-brand Polish vodka labels to the UK are proceeding.

All of these actions are intended to support future growth, but in the near term the company’s ordinary dividend looks very safe, although analysts expect it to remain flat this year. This is because, even as group sales stagnated from 2015 to 2016 at around €260m, underlying cash flow remained strong at €48.3m and more than covered the €39.2m paid in dividends.

However, last year’s ordinary dividend of 7.72 cents was bolstered by a special payout of 11.9 cents since the company had extra cash on hand due to not undertaking any large acquisitions. And that payout is unlikely to be repeated this year as the company has recently spent €18.3m acquiring a 25% stake in an Irish whiskey maker. This has led analysts to pencil in a yield of around 2.9% for 2017. A lower payout combined with troubles in Poland make me nervous, but I’ll be paying close attention to the company’s H1 results due to be released in early August.

Printing up profits 

Another big dividend option trading at a low valuation is banknote manufacturer De La Rue (LSE: DLAR). The company pays a 3.7% yield based on last year’s 25p dividend and is valued at 13 times trailing earnings.

Given a supply glut in the banknote market and increased use of non-cash payments, De La Rue is looking to branch out from its core banknote production focus. So far through organic expansion and acquisitions, the group now brings in 25% of revenue and around 30% of operating profits from its authentication and anti-counterfeiting product lines.

And in the meantime, as the divisions grow, the company’s dividend is in pretty good shape. Payouts have been kept flat at 25p for three years in a row as the company rebuilds its balance sheet and earnings following a handful of disastrous profit warnings. And with net debt just £120m, or 1.2 times EBITDA, and earnings per share of 47.2p safely covering payouts, there’s reason to be optimistic.

However, with problems in its core business persisting and expansion into other business lines still in their early days, I believe there are safer, higher-yielding options out there than De La Rue.

The post High-yielding Stock Spirits Group plc and De La Rue plc are trading at ultra-low valuations appeared first on The Twelfth Magpie.

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Ian Pierce 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.

Something is going right

If the firm’s customers are easily won over by cheaper competing products, as frequent references to ‘competition’ in the recent full-year results suggest, how likely is it that any of Stock’s brands will emerge as premier market-beating sellers across the world? Unlikely, I would suggest, but we should nonetheless keep alert to gathering strength in the company’s brands such as Stock, 1906, Amundsen, Keglevich, Saska, Silver and Boskov.

Stock Spirit’s stated goal is to become Central and Eastern Europe’s leading spirits business, and something is going right because the shares are up around 68% since December 2015. At today’s 175p share price, the forward dividend yield for 2018 runs at 3.5% or so. City analysts following the firm expect earnings to lift 9% during 2017 and 5% in 2018 and to cover the dividend payout around twice.

So, Stock has share-price momentum, growth and a reasonable dividend yield. On top of that, there is always the possibility that one or several of the firm’s brands could gain strength and popularity — perhaps enough to support higher profit margins and a campaign of international expansion.

I think Stock Spirits is an interesting investment proposition and you can pick the shares up on a reasonable-looking forward price-to-earnings (P/E) ratio of just over 14 for 2018.

Restructuring driving growth

I reckon operations must be cyclical at Vesuvius (LSE: VSVS), which serves the steel and foundry industries dealing in molten metal flow engineering solutions for demanding industrial environments. The firm aims to help its customers improve their manufacturing processes, enhance product quality and reduce energy consumption by supplying flow control solutions, advanced refractories and other consumable products, as well as related technical services and data capture.

The company’s offering is embedded in the industrial environment and I don’t think the firm’s customers will invest as much into Vesuvius’s products and services when economic times are tough. In the full-year results statement delivered in March, chief executive Francois Wanecq described market conditions as “challenging” during 2016. However, a restructuring programme drove a return to growth in sales, and City analysts following the firm expect earnings to lift 12% during 2017 and 10% in 2018.

Good momentum

The share price is responding well — up almost 90% since the beginning of 2016 — and it’s hard to ignore the firm’s operational and share-price momentum, which looks set to continue, at least in the short-to-medium term.

If you hop aboard the story today you’ll receive a forward dividend yield running around 3.4% for 2018 with the payout covered just over twice by those forward earnings. At today’s 525p share price, the forward P/E ratio runs at a little over 14 – almost identical to Stock’s — so these two interesting firms make a good comparison. Which do you prefer?

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Kevin Godbold 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.

With this in mind, let’s look at two small-cap businesses, both of which release results to the market in the near future and ask whether either is deserving of your capital.

Viva la revolución!

It’s been a rather good first year as a listed company for Revolution Bars (LSE: RBG) and its shareholders. Priced at 168p 12 months ago, stock in the 66-strong premium bar operator now changes hands for 204p — a 21% increase.

Based on January’s trading update for the 26 weeks to the end of last year, I can see this kind of performance continuing in 2017. Overall sales at the Ashton-Under-Lyne-based £101m cap were 12.7% higher (at £66.6m) than for the same period in 2015. Christmas and New Year were also particularly strong with Group sales rising 16.2% over the five-week festive period. 

In H1, the company opened four new Revolución de Cuba bars in Harrogate, Aberdeen, Reading and Glasgow. A fifth — in Southend on Sea — is due to open in H2. Seemingly keen on developing its pipeline, I wouldn’t be surprised if next Tuesday’s interim results included details of new locations the business was targeting.

Trading on a price-to-earnings (P/E) ratio of 12 in 2017 (reducing to just under 11 in 2018 based on earnings estimates), Revolution’s stock carries an appealing valuation. What’s more, its low price-to-earnings growth (PEG) value of 0.9 suggests that investors won’t be paying through the nose to be a part of management’s plans to expand the business.

The 2.7% yield on offer from Revolution might seem low to some but this is projected to rise to 3% in 2018 and compares favourably to that offered by peers like J D Wetherspoon. The fact that payouts will be covered over three times by earnings leads me to suspect that dividends will continue to grow at a fair clip over the medium term. The company’s net cash position will also be highly attractive to investors keen to avoid companies weighed down by debt.

Strong cash flow

Holders of premium branded spirits and liqueur producer Stock Spirits (LSE: STCK) also enjoyed a profitable 2016 with shares finishing the year 31% higher than where they started.

Like Revolution, Stock Spirits provided an update to the market back in January. Despite “highly competitive trading conditions“, there were indications that business remained robust, particularly in Poland where the group has the second largest share of the market.

According to the company, cash flow was strong with net debt standing at around €60m. While slightly higher than 2015’s figure, this is certainly a lot less than a few years ago when debt levels were over €300m.

With sales of alcohol remaining resilient even during times of economic uncertainty, those concerned by Brexit may wish to take a closer look at the company. Exporting over 40 brands to more than 40 countries worldwide, a lack of geographical diversity isn’t an issue with Stock Spirits.

Trading on 17 times earnings for 2017, shares might be more expensive than those of Revolution Bars but this valuation compares favourably to industry peers such as Diageo (22) and Fevertree (55). While I’m inclined to wait until full-year results are announced on 8 March, it’s a tentative buy from me.

The post Should you be stocking up on these ‘secret’ small caps before results come in? appeared first on The Twelfth Magpie.

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

It may not sound like much of an increase, but Sainsbury’s sales fell by 0.4% over the same period last year. Investors may also be cheering news that like-for-like sales at Argos rose by 4% over the 15 weeks to 7 January. This lifts the group’s overall like-for-like sales growth to 1% — a respectable figure in a market where many retail sales are still falling.

Today’s figures confirm my view that last year’s acquisition of Argos owner Home Retail Group was a smart move.

These shares could hit 400p

I added Sainsbury shares to my portfolio during December. The share price has risen by about 10% since then, but I don’t think it’s too late to buy. In my view, Sainsbury continues to look good value for a number of reasons.

The group’s forecast dividend yield of 3.8% is the highest in the supermarket sector, while its forecast P/E of 13 is the lowest. This rating indicates that the market isn’t expecting Sainsbury to deliver much in the way of growth over the next year.

I’ve no way of knowing whether this is accurate, but I expect the group will return to growth over the next two or three years. One reason for this is that over the next three years, Sainsbury expects to achieve £160m of cost savings from combining the Argos and Sainsbury’s businesses. To put that into context, remember that these two companies generated a combined operating profit of £830m last year. These savings could lead to a worthwhile improvement in profit margins.

In my view, buying at today’s relatively undemanding valuation should mean that the risk of losing money is limited. I believe there’s scope for Sainsbury’s share price to reach 400p over the next few years, and continue to rate the stock as a buy.

A potent small-cap pick?

Premium drinks producer Stock Spirits Group (LSE: STCK) has been a strong performer over the last year, climbing by 46% in 12 months.

The group’s spirits and liqueurs are sold in Central and Eastern Europe. In a year-end trading update today, Stock Spirits said its business had performed well in the fast-growing Polish vodka market. This is a key area of interest for investors, as the group struggled against cut-price competitors in Poland in 2015, and had to issue a profit warning. The share price has only just returned to the level seen before that profit warning.

Today’s statement confirmed that full-year profits for 2016 are expected to be in line with expectations. This give the stock a forecast P/E of 18, with an ordinary dividend yield of about 3.3%. Earnings are expected to rise by 10% to €0.13 per share in 2017, giving a forecast P/E of 16 for the current year.

In my view, Stock Spirits remains a potential buy at current levels. The group appears to have returned to growth and seems to be trading well. If you’re looking for growth buys, you may want to take a closer look.

The post Why 1% sales growth makes J Sainsbury plc a buy for me appeared first on The Twelfth Magpie.

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

Today, the sector’s biggest player Prudential (LSE: PRU) stepped up to the plate, and the shares jumped 3% higher following its 09:00 results release. The group beat analyst expectations with a 9% rise in operating profit. Asia was particularly strong at 15%.

Prudential continues to benefit from its focus on serving the needs of an increasingly wealthy younger population in its Asian markets and the growing number of retirees in its US and UK markets. Management acknowledges the uncertainty created by the EU referendum result but says “diversification by geography, currency, product and distribution should reduce the impact on the Group.”

After the indiscriminate sell-off of financial stocks in the wake of the Brexit vote, Prudential’s shares have climbed back above their pre-referendum level, as the market has refocused on the company’s sound fundamentals and attractive geographical exposure.

Management said today that it remains on track to achieve its financial objectives for 2017. Trading on just 11 times that year’s forecast earnings, I reckon Prudential is very buyable at a current share price of around 1,420p.

Upgrades to come

Gold miner Centamin (LSE: CEY) released strong half-time results this morning and upgraded its guidance for the full year. The FTSE 250 firm said gold production in Q2 was 12% higher than in Q1. This increased production, together with higher realised gold prices ($1,268 an ounce compared with $1,196) and improving operational efficiencies, drove EBITDA up by 51%.

Looking ahead to the full year, the company raised its production guidance to between 520,000 and 540,000 ounces from the previous 470,000 ounces. Meanwhile, cash cost of production guidance has come down to $530-$550 an ounce from $680 and all-in sustaining costs to $720-$750 from $900.

Centamin is cash-rich with no debt and aims to generate substantial free cash flow to self-fund the business even when the gold price isn’t particularly favourable. Although the shares are trading at record highs today (currently 175p) and Centamin’s producing assets have single-country risk (Egypt), this is a well-run company and remains an attractively-valued prospect with analysts set to upgrade their earnings forecasts.

Spirited revival

Shares of Vodka maker Stock Spirits Group (LSE: STCK) have also risen today on the back of its half-year results announcement. The FTSE SmallCap firm, which is a leading player in central and eastern Europe, went through a bit of boardroom turmoil earlier this year following a poor 2015 performance from its Polish business that generates over half of group revenues.

However, the company reported distinct signs of recovery in the business during the first half of this year, and with higher margins and increased EBITDA across all its territories, the overall group performance bodes well for the future.

Stock Spirits also announced today the promotion of a non-executive director to the role of chief executive. The boardroom now looks more settled, management sees no significant issues from Brexit and the prospects for the business are brightening again.

At a current share price of 162p, Stock Spirits trades on less than 13 times its pre-Poland-stumble earnings, which makes this defensive stock an attractive buy to my mind.

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

All too often, income-hungry investors give in to the temptation of a high yield, only to see the dividend get cut and the share price collapse. Instead, investors should focus on companies with sustainable dividend outlooks and growing free cash flow generation.

With this in mind, I’m going to take a look at whether investors should buy these 3 dividend stocks:

Downtrend

HSBC‘s (LSE: HSBA) 7.8% dividend yield clearly stands out from the crowd. Its yield is the highest of all large UK bank stocks and well above the FTSE 100 Index‘s average dividend yield of 4.0%.

In line with its progressive dividend policy, HSBC raised its dividend to $0.51 per share in 2015, and is set to raise it further, to $0.52 per share for 2016. But although dividend payouts have been rising, earnings have been on a steady downtrend. As a result, dividend cover has been steadily falling too, and currently stands at just 1.3 times.

What’s more, asset sales, particularly the disposal of its Brazilian unit, are seen as vital to securing HSBC’s progressive dividend policy. HSBC still needs extra capital before it meets the stricter capital rules that are set to come into force in 2019, and the only way to meet those stricter requirements without cutting dividends is through asset sales.

However, big M&A deals are risky, and if a sale falls through or becomes delayed, HSBC may have no option but to cut dividends. And that’s before we factor in the risk of further bad loans in Asia or a further softening of economic growth in emerging markets.

The markets clearly agree that HSBC is at risk of a dividend cut. Shares in the bank have fallen by 15% since the start of the year, and dividend futures are pricing a 22% cut in its dividend for 2017.

Slowing growth

After strong dividend growth over the last decade, Diageo (LSE: DGE) seems set for a future with slower growth. A downturn in emerging markets and changing consumer tastes have weighed on the performance of the world’s biggest distiller. Organic sales rose by just 1.8% in the 6 months to 31 December, while adjusted EPS slumped by 4%.

The distiller is combating the slowdown in sales by expanding into new markets, such as Turkey and India, and cutting costs. All these efforts require money, and with earnings in poor shape, there is little room for further expansion in dividend payments.

Diageo raised its interim dividend by 5% this year, but that’s down from a rise of 9% last year. And despite the slower pace of dividend growth, dividend cover is falling too. Only three years ago, earnings covered its dividend payments by more than 2 times. By the end of 2016, its dividend cover is expected to fall to just 1.5 times.

That still means its dividend is secure, but with a yield of 3.1%, you would expect to have more growth potential.

Special dividend

Earlier this week, small-cap rival Stock Spirits Group (LSE: STCK) announced a 10p per share special dividend to be paid to shareholders on 27 July 2016. The record date for the special dividend is 8 July 2016, meaning potential investors need buy the stock two days before that date to be entitled for dividend payment, under the T+2 standard settlement period.

The company is able to pay this special dividend because the board is no longer seeking major M&A deals. Under pressure from activist investor Luis Amaral, management is trying to unlock value by returning more cash to shareholders.

Including its special dividend, I expect Stock Spirits to pay around 15p in dividends this year. This gives it a very attractive prospective yield of 9.3%.

The post Should you buy HSBC Holdings plc, Diageo plc & Stock Spirits Group plc for their dividends? appeared first on The Twelfth Magpie.

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