It doesn’t bother me the FTSE 250 retailer carries a forward P/E multiple in and around the bargain-basement level of 10 times. Nor am I shaken by its market-beating corresponding dividend yields of 5.5%. The sharp downturn in the UK retail sector in 2019, one which has driven Topps Tiles’s share price 20% lower over the past 10 weeks alone, is of far more concern to me right now.

It’s not as if the home improvements giant wasn’t already on the ropes ahead of the further deterioration in the UK retail sector in the spring, one which suggests shops are experiencing the worst conditions for more than 30 years.

Last month, Topps Tiles announced like-for-like sales had slowed even further in the six months to March, to a paltry 0.2% from the 0.6% rise printed in the same period a year earlier. And I fully expect another set of chilly numbers when those third-quarter numbers are unveiled.

Stop talking

I’m also content to shun TalkTalk Telecom Group (LSE: TALK) in the run-up to first-quarter financials being unpacked on Wednesday, 17 July.

It’s full-year results of a month ago certainly gave plenty to worry about, the company just clinging onto the downwardly-revised EBITDA target which it issued as recently as February for the 12 months to March. And this was achieved in large part through regulatory cuts to what it has to pay Openreach for fibre and a commercial discount deal it has with BT’s infrastructure division too.

Intense competition continues to play havoc in spite of TalkTalk’s efforts to grab share by introducing its ‘Fixed Low Price Plans’ for new and existing customers. That aforementioned release showed its customer base rose by just 2,000 in the final three months of fiscal 2019, versus 44,000 in the prior quarter.

TalkTalk trades right now on a forward P/E ratio of 16.2 times, not cheap for a share with such a troubling profits outlook, in my opinion. In fact, this rating really leaves the telecoms titan in danger of a share price correction should its client base indeed continues to collapse in quarter one.

Out of juice

The final share I think should be avoided in July is SSE (LSE: SSE), one which is set to release its own first quarter numbers on Thursday, 18 July.

We all know how the ‘Big Six’ electricity suppliers are losing customers at a jaw-dropping pace, with SSE haemorrhaging more than half a million accounts in the last fiscal year alone. Things are likely to have remained difficult since the period’s end too, reflecting the toughening economic conditions here in the UK.

In fact, as the pressures created by the Brexit saga propels more and more homes into the arms of independent, promotion-led operators, I’m expecting newsflow from the likes of SSE to continue worsening as 2019 progresses, and probably beyond too.

So you can keep its low rating (illustrated by a forward P/E ratio of 9.2 times) and its big 7.4% prospective dividend yield. I’ll be happy to go share shopping elsewhere next month.

The post Red alert! 3 stocks I’m avoiding in July (like this FTSE 100 7%+ yielder) appeared first on The Twelfth Magpie.

More reading

• How UK shares could build a £339,849 ISA
• Growth AND dividends? Check out this top cheap penny share!

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.

Today I’m going to take a fresh look at two well-known-but-unloved stocks. Does either company offer a contrarian buying opportunity?

A diamond in the rough?

FTSE 100 bank Barclays (LSE: BARC) needs no introduction. But the company’s increasingly successful turnaround hasn’t been enough to win round investors. Barclays’ stock has fallen by around 25% over the last two years, despite the bank returning to profit and settling most of its misconduct issues.

Former Barclays boss Bob Diamond was quoted in the Financial Times this week saying that “banks, insurers and broker-dealers” look cheap. Mr Diamond said that financial services is the only sector where valuations are lower than they were in 2008.

As I discussed recently, some investors believe there are good reasons why banking stocks should be cheap. But Barclays’ latest accounts certainly suggest to me that the shares may deserve a higher price tag.

A hat-trick of cheapness

Barclays’ shares score highly on three key measure of value. At a last-seen price of 165p, the stock trades at a 36% discount to its tangible net asset value of 260p per share.

The shares look cheap relative to earnings as well. Broker forecasts put the bank on a 2018 forecast P/E of 7.4, falling to a 2019 P/E of 7.1. These forecasts have risen in recent months, which is often a sign of positive momentum.

Finally, after years of below-average dividends, this year’s planned payout of 6.5p per share gives the shares a tempting 3.9% dividend yield. Analysts expect the payout to rise again in 2019.

An economic downturn would probably put these forecasts at risk. But if you share my view that banks are finally recovering from the financial crisis, then I believe Barclays shares are a buy at current levels.

One stock I’m avoiding

Back in July, I said that TalkTalk Telecom Group (LSE: TALK) could be “a tempting turnaround”. Does that view still hold?

Last week’s half-year results seemed broadly positive, with customer numbers up by 104,000 to 4.2m and customer churn down to 1.2%. The number of customers opting for fibre broadband rose and average revenue per user — a key metric — was said to be “improving”.

However, expansion of the group’s full fibre network seems to have stalled. An agreement with planned funding partner Infracapital has been terminated, and the group has not yet found a replacement.

With net debt of £760m, TalkTalk is in no position to fund the rollout by itself. The group’s borrowings represent nearly 3x EBITDA (earnings before interest, tax, depreciation and amortisation). I’d prefer to see a figure of 2x or lower, especially as TalkTalk’s underlying operating margin remains slim, at just 3.6%.

I’m staying away

TalkTalk shares trade on 19 times forecast earnings for 2018/19. This falls to a P/E of 16 for 2019/20, but the group’s high level of debt means the shares look far too expensive to me.

I suspect that executive chairman and founder Sir Charles Dunstone will turn this business around successfully. But I don’t think the stock is cheap enough to buy.

The post Have £2,000 to invest? Why I’d buy the Barclays share price today appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Up 50% in a year! That’s not the only reason I’d consider buying Barclays over Nvidia stock today
• Barclays shares could soon soar another 21%, according to the latest price target
• After a 160% rally, major brokers still see more gains for Barclays shares. Here’s why
• How many Barclays shares do I need to buy to get a £1,000 passive income?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Bad to Talk

It hasn’t been good to TalkTalk for some time with the FTSE 250-listed stock trading 54% lower than five years ago (the 2015 hacking scandal didn’t help) as it has struggled to compete in the competitive broadband market. There was some respite in today’s first-half results with its customer base up 104,000 to 4.24m and churn falling to its lowest ever level of just 1.1% in the second quarter.

Statutory revenue, which covers all sources of earnings, fell 0.6% to £822m as TalkTalk exited its mobile virtual network operator (MVNO) proposition. However, headline revenue excluding Carrier and Off-net earnings rose 3.9% to £771m.

TalkTalk also announced an acceleration of its full fibre strategy, launching a new company, FibreNation, to roll out faster, more reliable full fibre broadband to 3m homes and businesses. The first three towns to benefit will be Harrogate, Ripon and Knaresborough, alongside a trial site York, with a combined footprint of more than 100,000 homes and businesses. 

Dividend cut

The group is also moving its HQ to Salford, to create one main campus and a more efficient operating model. However TalkTalk’s turnaround strategy involves cutting its dividend to help pay for its full fibre plans and its has cut the interim dividend to 1p per share, down from 2.5p last year. It offers a low forecast yield of 2%, with cover of 2.4.

There was some good news today, but not enough to justify the current forward valuation of 18.4 times earnings, as earnings forecasts disappoint. TalkTalk isn’t cheap.

Snail Mail

Investors in Royal Mail (LSE: RMG) have had an equally rough ride over the last five years with the stock down 44%, but at least they get a massive 7.8% yield. Cover may be wafter thin at just 1.1 but it doesn’t seem at risk yet, with CEO Rico Back increasing the interim payout by 4% to 8p last week.

Royal Mail reported a 25% drop in underlying operating profit before transformation costs to £242m, as a 6% rise in parcel volumes failed to offset the 7% fall in letter volumes in the six months to 23 September. Trading at 316p, it is below its flotation price of 330p (so maybe it wasn’t overvalued after all) and it could even fall below 300p.

Income delivery

The £3.15bn company is trading at a discounted price, in this case 11.7 times forecast earnings. That buys you an uncertain outlook, with earnings per share forecast to fall a whopping 40% in the year to 31 March 2019, and zero growth anticipated the next year.

Royal Mail is struggling to generate new income streams, with underlying first-half revenues up just 1%, although adjusted group operating profit before transformation costs remains unchanged at £500m to £550m. Management clearly has a battle on its hands turning things around, and victory is far from certain. On the other hand, the share price now looks tempting, while the yield is dizzying. I would buy it ahead of TalkTalk.

The post Is the Royal Mail share price or this falling FTSE 250 knife the brighter bargain today? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

Two of these firms have been forced to slash their dividend payouts since January.

The third company is struggling to deliver the promised benefits of an acquisition which quadrupled the size of its operations.

Despite these setbacks, I believe that each of these stocks offers a potential opportunity at current levels. Today I’ll be asking whether any of these companies deserves my buy rating.

This breakdown was inevitable

Roadside assistance firm AA (LSE: AA) made a confident return to the stock market in 2014, tempting investors with its strong brand, high profit margins and strong cash generation.

Well-known City figures like fund manager Neil Woodford bought into the stock, which was expected to become a high-yield dividend favourite. Unfortunately the shares have lost 70% of their value over the last three years. So what’s gone wrong?

For a short period in 2016 and 2017, the AA lived up to its promise, paying an annual dividend of 9p per share. But this payout was slashed to 5p in 2017/18 and has now been cut to just 2p per share for the foreseeable future.

Two big problems

The biggest problem is debt. AA floated with net debt of about £3.2bn. Thanks to lengthy efforts to refinance this mountain of borrowed money, this total has now fallen to about £2.7bn. But that’s still about 24 times last year’s annual profits.

This level of gearing was always likely to be hard to manage, given the group’s second problem — a lack of growth. Since 2014, annual sales have remained largely unchanged at about £950m, and profits have fallen from £153m in 2014 to just £111m last year.

Luckily, the group’s operating margin has remained high, at about 32%. Chief executive Simon Breakwell expects this to result in free cash flow of about £80m next year and at least £100m from 2020/21 onwards.

The bad news is that I expect most of this cash to be used to service the group’s debt. What little is left will likely be needed to try and find ways of boosting growth.

The shares currently trade on a forecast P/E of 7.6 with a prospective yield of 1.7%. I don’t see much attraction in investing until debt falls or growth improves.

I’m tempted by this shocker

One of the biggest fallers in the FTSE 350 this year is broadband and mobile provider TalkTalk Telecom Group (LSE: TALK). The shares have lost 24% of their value since January and the dividend has been cut again. This year’s dividend is expected to be 2.9p per share, 80% less than the 15.9p payout shareholders received in 2015/16.

This situation has been brewing for some time. A couple of years ago, I noted how the company appeared to be paying its dividends without earnings cover, using borrowed cash. Companies that do this consistently tend to run into problems, and TalkTalk was no exception. The group’s net debt rose from about £390m in 2013 to a peak of £782m in 2016/17, when after-tax profit was just £58m.

The group is now firmly in turnaround mode under new chairman Sir Charles Dunstone, who originally founded TalkTalk as part of his Carphone Warehouse group. Net debt is down to £755m and operational progress seems positive. I think this could be a decent turnaround story.

The right time to buy?

Market conditions for telecoms firms appear to be tough. Larger rivals Vodafone and BT Group are both out of favour with investors at the moment. But I think TalkTalk’s low-cost, no-frills ethos could be a winner in today’s uncertain economic climate.

The group’s latest trading update showed a net increase of 80,000 broadband customers during the first quarter, taking the total to more than 4.2m. Headline revenue rose by 4.1% during the first quarter and chief executive Tristia Harrison expects to report a 15% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) this year.

Analyst forecasts put the stock on a 2018/19 price/earnings ratio of 18.9 with a prospective yield of 2.5%. That still seems a little expensive to me, given that net debt remains high. But I expect to see a successful turnaround here over the next few years.

This FTSE 100 flop could bounce back

IT group Micro Focus International (LSE: MCRO) has built its reputation by acquiring legacy software businesses and cutting costs. This worked very well until the group agreed an $8.8bn deal to acquire the software business of Hewlett Packard Enterprise.

This deal quadrupled the size of the business and has lifted revenue from £1,381m in 2017 to a forecast level of £3,910m this year. But integrating the HPE software business has proved challenging. In March, Micro Focus warned that sales would be lower than expected this year.

However, interim accounts published earlier in July suggest the group could be getting back on track. The company said that revenue was falling more slowly than earlier this year, and that good progress was being made on integration.

Executive Chairman Kevin Loosemore blamed the earlier shortfall on “inconsistent” application of the Micro Focus operating model, which is now being applied “fully and robustly” across the group following management changes.

This 5.9% yield looks tempting

Micro Focus is expected to deliver earnings of around $1.87 per share this year, with a dividend of about $1 per share. This puts the stock on a forecast P/E of about 9.2 with a prospective yield of 5.9%.

In my view this could be worth considering as a long-term dividend pick. Mr Loosemore’s record was good prior to the HPE deal. It may be that changes to management have resolved the operational problems which followed this super-sized acquisition. I can see decent value here on a medium-term timeframe.

The post The 3 worst dividend stocks of 2018 (so far) appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head owns shares of BT. The Motley Fool UK has recommended Micro Focus. 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 looking at two companies that have lagged the mid-cap index over the last five years. Both firms have recently released news suggesting that they could now be profitable turnaround buys. But risks remain. So is now the right time to buy?

Dialling up growth

Phone and broadband group TalkTalk Telecom Group (LSE: TALK) has lost 54% of its value over the last five years. But the company’s fortunes are looking up. The TalkTalk share price rose by up to 8% on Tuesday morning after the company reported a 4% increase in core revenue during its first quarter.

The group added 80,000 new customers during the period and said that 2.1m of its 4.2m customers were now signed up to fixed low-price plans. This is helping to keep customer churn low, with just 1.28% of customers leaving during the period.

Debt worries

The group’s turnaround appears to be going well. My only remaining concern is the level of debt. Net borrowing totalled £755m at the end of March. This gave a net debt/EBITDA ratio of 3 times — well above my preferred maximum of 2 times.

Plans to reduce debt levels by selling the firm’s business division to Daisy Group have fallen through. But the company needs to keep spending in order to upgrade its network. My feeling is that further debt reduction could be slow, unless the company resorts to another equity placing.

The right time to buy?

Although I’m concerned about TalkTalk’s debt levels, the company confirmed today that adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to rise by 15% this year, in line with previous guidance. If net debt remains flat, this earnings growth should reduce the group’s net debt/EBITDA ratio to a more acceptable 2.6 times.

Analysts expect adjusted earnings of 5.9p per share this year, rising by 30% to 7.7p per share in 2019/20. These figures put the stock on a forecast P/E of 20, falling to a P/E of 15 next year. Now could be a good time to take a fresh look at this turnaround story.

This could be a value trap

When management turns down a takeover proposal for a troubled business, it has to be confident it can deliver a superior result for shareholders. The jury is still out on whether bus and train operator FirstGroup (LSE: FGP) will be able to do this after recently rejecting a takeover proposal from private equity group Apollo Global Management.

The firm faces a number of headwinds. At £1,070m, net debt is still too high, despite falling last year. Improved cash flow should help this figure to reduce, but the Aberdeen firm also faces issues in its Greyhound and TransPennine Express operations.

A trading update today confirmed that performance so far this year is in line with expectations. FirstGroup has begun to withdraw from some of its Greyhound operations in Canada, which is expected to improve profit margins from road operations.

The shares look cheap on 6.7 times forecast earnings, with a forecast yield of 4%. But this company has disappointed investors for a number of years. Although it may now deliver a successful turnaround, I believe there are better buys elsewhere in the transport sector.

The post Are these FTSE 250 dividend growth stocks beautiful bargains or value traps? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

Lower level

But what’s this? Here’s something new. The share price at British American Tobacco (LSE: BATS) has fallen sharply in recent days, following the announcement that US regulators want to lower nicotine levels to cut tobacco-related deaths. Last Friday, the US Food and Drugs Administration said it aimed to lower nicotine levels in cigarettes to non-addictive levels, instantly knocking 12% off British American tobacco’s share price.

The company is down another 3.6% today, so markets clearly think this is a big deal. However, British American tobacco has fought off plenty of regulatory and health initiatives before, and now much of the potential pain has been priced in. So this could be an opportunity. 

Income winner

Last Thursday, it posted a strong set of half-year results with revenues up 15% year-on-year, helped by sterling weakness, and profits up 16.3% at £2.57bn. It declared an interim dividend of 56.5p, up 10% on last year, as it moves towards paying quarterly dividends from January. The yield is currently a forecast 3.7%, with solid cover of 1.6. Forecast profit growth looks promising: City analysts expect 2016 profits of £6.24bn to leap to £7.56bn in 2017, then to top £10bn in 2018, helped by the recent Reynolds acquisition.

Smoking may be in serious decline, particularly in the West, but British American Tobacco has shown time and again it is able to keep publishing massive revenues and serving up generous dividends, and I don’t see this changing. The group’s market share continues to grow, up 30 bps, with its Global Drive Brands up 50bps. This is important, as volumes come under pressure from continuing health campaigns. New-generation alternatives such as vaping may help offset declines in revenues.

Good to TalkTalk

Broadband and bundle supplier TalkTalk Telecom Group (LSE: TALK) has also wobbled lately. Last autumn the share price took a hammering after cyber hackers gained details of 150,000 customers, for which it was slapped with a £400,000 fine. This overshadowed positive news of a tripling in half-yearly pre-tax profits to £46m, up from £14m one year earlier.

TalkTalk suffered another blow earlier this month, reporting that revenue slid 3.2% in the three months to the end of June. This was down to a drop in consumer revenues due to a smaller average on-net base and the dilutive effect of re-contracting activity, although it still expects full-year revenues to grow. Customer churn is shrinking, while it now has 1.3m customers on fixed price plans.

Income hit

In May, TalkTalk took a knife to the dividend as it looks to resume its former role as a low-cost challenger to BT, Virgin and Sky. However, it is still forecast to yield 4.6% in 2018, with cover of 1.2, down from 5.52% today. With the share price of 185p well below its year-high of 250p, this a tempting entry point for long-term buy-and-holders.

The post 2 income stocks I’d buy and hold for the next 10 years appeared first on The Twelfth Magpie.

More reading

• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?
• Double a state pension thanks to dividend shares? Here’s how it could be done
• How much second income am I aiming for with £20,000 in this superb FTSE 100 dividend star?
• In the event of a stock market crash, is this one of the best stocks to consider buying?
• Here’s how much you’d need to invest in 5%-yielding dividend shares for £2,000 a year of passive income

Harvey Jones 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.

In the year to March, the London company slashed the annual payout to 10.29p per share from 15.87p in the prior 12 months, TalkTalk electing to rebase the dividend as part of new executive chairman Charles Dunstone’s drive to prioritise “growth, cash generation and profit.”

And City analysts do not believe the bad news is over just yet — an extra reduction, to 9.8p, is forecast for the current fiscal period.

On fragile ground

Many stock pickers will still be drawn in by a big dividend yield (this stands at 5.3% for fiscal 2018), not to mention predictions that rewards will begin rising again from next year. A 10p payout is forecast for 2019, pushing the yield to 5.4%.

However, I believe TalkTalk remains an unappealing share despite these projections. Firstly, current projections are at odds with the firm’s decision to reset the dividend to 7.5p per share for the present period. And I am far from confident that payouts should improve looking down the line.

The telecoms titan advised in May that dividend growth should resume “once business returns to earnings growth and leverage has reduced towards 2.0 times.” But the company still has a long way to go to get to its leverage target, its net debt-to-EBITDA ratio clocking in at 2.57 times as of March.

And TalkTalk faces a number of obstacles to earnings growth, even if the Square Mile has predicted expansion of 1% and 23% in the years to March 2018 and 2019 respectively.

While customers may be returning to the company after 2015’s disastrous data hack (the company added 22,000 new customers during January-March), TalkTalk may struggle to keep this pace going as rivals such as BT and Sky cut prices to lessen their rival’s position in the value segment.

I reckon the company’s uncertain sales outlook and mountainous debt pile should encourage income seekers to invest elsewhere.

A pretty picture

I am far more optimistic about the investment outlook of Photo-Me International (LSE: PHTM), meanwhile.

The Leatherhead company has a long record of meting out large dividend increases, assisted by its knack of cranking out solid earnings growth year after year. And City analysts expect further bottom-line progress to keep driving dividends higher.

An anticipated 7p per share dividend for the year to April 2017 is predicted to rise to 8.4p in the current period, supported by an estimated 5% bottom-line lift. Moreover, payments are expected to advance again to 9p in the following year, underpinned by a predicted 6% earnings improvement.

As a result, Photo-Me sports market-stomping yields of 5.2% and 5.6% for fiscal 2018 and 2019 respectively.

In June’s pre-close update the business announced last month that it had made “excellent progress” during the last fiscal year, reflecting “the success of its strategy of investing in new products, growing its laundry business and favourable currency movements.”Consequently Photo-Me expects pre-tax profit to have grown at a record pace of around 20% year-on-year.

And I am confident profits should keep on marching northwards as the firm bolsters investment in its photo booths of which Photo-Me currently has 46,000+ machines spanning 17 countries, and continues the expansion of its laundry division across Europe.

The post One 5% yielder I’d buy and one I’d sell appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

It’s good to…

TalkTalk Telecom Group (LSE: TALK) currently yields exactly 8%. Yesterday it was yielding 8.33%, but Friday’s 5% share price surge has trimmed that slightly. The surge was triggered by a positive note from HSBC, which upgraded its investment rating from hold to buy and hiked its price target from 175p to 250p. With the stock currently trading at 198p, that would suggest a potential 26% upside, if HSBC is proved correct.

This will only go a small way to reversing the disastrous performance of the past two years, which has seen the share price hammered by multiple cyber attacks, which cost the group £42m and contributed to the £18m fall in profits. TalkTalk also suffered reputational damage, when it emerged that the industrial scale fraud operation stemmed from Indian IT service firm Wipro, which it had contracted in 2011 to provide some of its call centre work.

Quite a bundle

Yet recent Q3 results were promising, with re-contracting rates in the third quarter stronger than expected, low churn, and a strong legacy business of loyal customers. The multi-services entertainment group is in recovery mode, its share price up 15% in three months, as it builds on its niche position in the UK telecoms market and looks to take advantage of greater demand for data and product generation, both for personal and business customers.

It is in a five-way stand-off, battling to hold its own against big boys such as BT, Sky, Virgin Media and Vodafone, but has held its own so far. Forecast earnings per share (EPS) growth of 55%, 11% and 12% over three years should drive down today’s pricey valuation of 22.5 times earnings to a far more acceptable 12 times, although the yield is still expected to stay high at 7.1%. This could prove a good call.

Carillion-aires

Construction business Carillion (LSE: CLLN) looks an even more tempting income play with its current yield of a mighty 8.66%. But as we know, you have to approach such a heady yield with caution. This reflects a tough decade for the company, whose share price topped out at around 435p just before the financial crisis to just 214p today, a drop of almost exactly half. Its struggles continue, with the share price down 25% over the last 12 months.

Carillion has been hit by falling profits from its overseas construction work and continuing low margins on the outsourcing side of its operation. Its 2016 results show that despite 14% mostly organic growth in revenues, profit before taxation fell 5% to £146.7m and basic earnings per share slumped 6% to 28.9p. The dividend was increased by just 1%.

Income pipeline

Its high-quality order book plus probable orders dipped from £17.4bn to £16bn over the year to 31 December 2016. However, that remains pretty healthy, as is dividend cover of 1.9. A forecast drop in EPS of 4% this year disappoints, even if it is due to climb a modest 3% in 2018. This company clearly has problems, but just look at that income. 

The post 2 battered dividend stocks yielding over 8% that could rebound appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Harvey Jones 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.

Today I’m going to look at two of these companies and explain why I’m staying away.

Good company, bad valuation?

Rolls-Royce Holding (LSE: RR) has made solid progress over the last year. The group’s chief executive, ex-ARM Holdings boss Warren East, has modernised the group’s supply chain and expects to have delivered £200m of annual cost savings by the end of 2017.

Mr East has also managed to negotiate a £671m settlement of bribery and corruption allegations with government agencies in the UK, US and Brazil.

The market has responded to this progress, and Rolls’ shares are worth 45% more than they were at the start of 2016.

I’m optimistic about its long-term future, but I don’t understand the stock’s valuation. In 2016, the group’s underlying earnings per share — the most generous measure of profit — fell by 54% to 30.1p. Adjusted pre-tax profit fell by 49% to £813m, but even this reduced figure wasn’t reflected in free cash flow, which was just £100m.

Analysts don’t expect much improvement over the next couple of years. Consensus forecasts suggest earnings of 33.9p per share in 2017, and 34p per share in 2018. The fact that so little growth is expected concerns me. Rolls-Royce trades on a demanding forecast P/E of 24, with a yield of about 1.7%.

It seems to me that if I buy stock at the current share price, I’m paying for growth and income that isn’t even on the horizon. The risk-reward balance doesn’t seem attractive to me, as there’s also a chance that things won’t improve as quickly as expected.

Dialling up a dividend cut

Headline profits are expected to have risen from £79m to £125.9m at TalkTalk Telecom Group (LSE: TALK) last year. This ought to be enough to put the group on a sound financial footing, but I’m not convinced.

In my view, TalkTalk has built up a combination of debt and dividend commitments that are unaffordable. The group’s dividend hasn’t been covered by earnings or free cash flow for several years. I believe this is one the reasons why TalkTalk’s net debt has risen from £497m in 2014 to £847m at the end of September 2016.

Interestingly, City analysts seem to be coming round to my point of view. TalkTalk said in February that the final dividend for 2016/17 is expected to be unchanged at 10.58p, giving a total of 15.9p. But the latest consensus forecasts show a dividend of 14.1p for 2016/17, with a larger cut of 15% to 11.7p pencilled-in for 2017/18.

I suspect analysts are starting to pencil-in changes which may be made after chief executive Dido Harding leaves the group in May. Baroness Harding will be replaced by internal hire Tristia Harrison as chief executive. But chairman Charles Dunstone will step up to executive chairman in May, suggesting that the Carphone Warehouse founder is going to play a more active role in running the company.

TalkTalk’s 7% dividend yield may seem attractive at first sight. But this generous payout looks unaffordable to me, and I believe a cut is inevitable.

The post 2 dividend champions I refuse to buy appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Roland Head 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.

The financial giant has seen its value advance almost 20% during the past six months alone, and is now dealing at its most expensive since the aftermath of June’s EU referendum.

However, I believe this is a good time for investors to cash in, as the risks facing the bank remain significant. Investors remain optimistic about Lloyds’ prospects, as economic data continues to outperform prior expectations. The OECD, for one, hiked its 2017 UK growth forecast to 1.6% from 1.2% just this month.

But the prospect of a sharp cool-down remains a very real possibility, as the UK adjusts for the Brexit process to begin in the months ahead. Indeed, the OECD expects growth to slow to just 1% in 2018, as EU withdrawal negotiations gather steam.

The City currently expects Lloyds’ earnings to rise 140% in 2017, resulting in a P/E ratio of 9.7 times. And this low multiple suggests that any risks facing the business are baked-in at current prices. I am not convinced, however, and reckon these forecasts could be subject to severe downgrades as 2017 progresses.

Meanwhile, those hopeful of further abundant dividend growth could also end up disappointed, as the size of PPI-related penalties appear to be picking up again. Earlier this month Lloyds made an additional £350m provision to cover the costs of previous misconduct, taking the total to date to £17.35bn.

So while the number crunchers expect the dividend to rise to 3.7p per share in 2017 from 2.55p last year, in my opinion investors should treat a subsequent 5.4% yield with some suspicion.

Telecoms troubles

Like Lloyds, investor appetite over at TalkTalk Telecom Group (LSE: TALK) also continues to simmer and the multi-services entertainment provider recently edged to its most expensive in four months.

TalkTalk saw revenues dive 5% during October–December, to £435m, due to the introduction of low-price packages in October on top of re-contracting effects.

The company is hoping that this could prove a temporary problem, but the business may struggle to get sales chugging resolutely higher again as traditional players like BT, Sky and Virgin Media — and more recently the likes of Vodafone — battle for its business.

The City has no such concerns, and expects earnings at the business to rise 55% in the year to March 2017, and by an additional 8% the following year.

These readings result in P/E ratios of 13.7 times and 12.6 times respectively — attractive on paper but not low enough given that TalkTalk’s markets are becoming ever tougher.

And TalkTalk’s swelling debt levels are also anticipated to hurt dividends in this period and beyond — last year’s reward of 15.87p per share is estimated to drop to 14.6p this year and again to 12.6p in fiscal 2018.

While these projections yield a market-busting 8% and 7.1% for this year and next, I reckon TalkTalk’s long-term outlook remains on shaky footing and that the stock is thus too risky at present.

The post Lloyds Banking Group plc and TalkTalk Telecom Group plc keep surging. Time to sell up? appeared first on The Twelfth Magpie.

More reading

• Is there any value left in Lloyds shares now they’re over £1?
• Prediction: this UK growth stock will outperform Lloyds shares over the next 5 years
• Barclays, NatWest or Lloyds shares: which is the better pick for a UK retirement portfolio?
• Here’s how much I think Lloyds shares will be worth by the end of 2027
• How to target a tax-free passive income of £1,275 a month on top of your State Pension

Royston Wild 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.