Can You Bank On 5%+ Yields From Vodafone Group plc, EVRAZ plc and Carillion plc?

Should investors top up holdings in Vodafone Group plc (LON:VOD), EVRAZ plc (LON:EVR) and Carillion plc (LON:CLLN) after recent falls?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This week’s sell-off has created some very tempting income buys. Three examples are Vodafone Group (LSE: VOD), Evraz (LSE: EVR) and Carillion (LSE: CLLN), each of which offers a forecast yield of more than 5%.

However, each of these three companies is facing certain risks that could affect the safety of its dividend payout.

Vodafone

Vodafone’s earnings have crumbled over the last two years, thanks to headwinds in Europe and the loss of its share of the profits from US firm Verizon Wireless. Earnings per share are expected to fall from 21.75p in 2014/15 to just 5.3p in the current year. Despite this, the mobile giant has promised to maintain its 11.5p dividend payout.

Should you invest £1,000 in HSBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?

See the 6 stocks

Vodafone’s current share price suggests that the market believes this promise. The firm’s shares currently trade on a forecast P/E of 42, falling to 36 in 2016/17. That’s not a normal valuation for such a large firm, but is supported by Vodafone’s 5% yield.

As a Vodafone shareholder myself, I’m not overly concerned about a dividend cut and expect earnings to improve over the next couple of years. However, I’d only add to my holding if the share price dipped below 200p.

Evraz

Russian coal miner and steel producer Evraz suffers from what I call the ‘Russian discount’. The risks posed by currency problems, economic sanctions and potential political interference mean that Evraz shares currently trade on a 2015 forecast P/E of just 4.2.

I’m starting to wonder whether these risks are overstated. Evraz reported its interim results today, revealing first-half free cash flow of $372m on turnover of $4.9bn.

Cost cutting has probably been helped by the Russian rouble’s devaluation against the dollar, and Evraz generated cost savings of $149m during the first half. This was enough to push the firm’s operating profit for the period up from $297m in 2014 to $479m, giving an operating margin of 10%.

One risk is that Evraz does have a lot of debt. Interest payments of $229m swallowed around half of the firm’s operating profit during the first half of the year.

However, the firm’s 2015 forecast dividend of 7.5 cents would cost just $68m to pay. This looks safe enough to me. With a prospective yield of 6.2%, I think Evraz could be worth a closer look.

Carillion

Outsourcing and construction firm Carillion is currently the most heavily-shorted company in the UK. According to regulatory figures, 15.9% of Carillion shares are on loan to funds who are betting that the company’s shares will fall.

The firm isn’t an obvious basket case. According to this week’s interim results, underlying earnings per share rose by 8% to 15.9p during the first half, while revenue was up 16%. Carillion expects to hit full-year earnings forecasts of 34.1p per share.

However, one possible concern is that Carillion’s profit margins are falling. Gross margin fell from 9.5% to 7.8% during the period, suggesting Carillion is struggling to maintain pricing power relative to its costs. The firm also has a £446m pension deficit that required £22m of additional payments during the first half.

Carillion looks cheap, with a 2015 forecast P/E of 10 and a prospective yield of 5.5%. However, I think there is a risk that performance could stagnate, and would steer clear for now.

Should you invest £1,000 in HSBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Vodafone Group. 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.

More on Investing Articles

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »