Income stalwart National Grid (LSE: NG) is usually considered a high-yield stock, but the grid operator’s 5.2% yield is dwarfed by the cash-backed 9.5% prospective yield on offer at GVC Holdings (LSE: GVC)?
Of course, there are some obvious differences between the two firms.
National Grid is a £32bn FTSE 100 giant with a regulated income and a captive market. GVC is a £266m AIM-listed online sports-betting firm. This is a sector where profits and market share can be very volatile.
Despite this, GVC’s growth has been impressive. Today’s interim results from the company suggest that there could be more to come.
Betting profit
GVC said that wagers rose by 18.6% to €824m during the first half of the year. Net gaming revenue, which is total wagers less payouts, rose by 15.1% to €121m.
Although these figures imply that GVC’s punters won slightly more often than in the first half of 2014, this slight downside is outweighed by the strong rise in activity levels, in my view.
Adjusted earnings per share rose by 25% to €0.33 per share, suggesting the firm should be able to meet current full-year forecasts for earnings of €0.70 per share. This puts GVC shares on a forecast P/E of about 8.5.
GVC’s dividends are paid from the firm’s free cash flow, which was €20.8m during the first half. Of this, €17.2m was paid out as dividends, giving a payout for the year to date of €0.42 per share. That’s a 5% increase on the first half of 2014.
Bwin acquisition
GVC is focused on expansion and is currently in the middle of a bidding war with 888 Holdings to acquire Bwin.party Digital Entertainment.
Bwin’s management has previously recommended 888’s offer, but GVC is expected to make a final proposal to Bwin early next week.
The acquisition of Bwin could be transformative for GVC, if successful. Bwin’s 2014 revenues of €612m were almost three times those of GVC during the same period.
What about National Grid?
Despite GVC’s attractions, there are risks. The firm faces the constant risk of regulatory changes and tax hikes which could slash its profits. Unforeseen problems such as those which affected Plus500 earlier this year are also a possibility.
None of these risks need to concern investors in National Grid. The firm enjoys good long-term earnings visibility, and in 2013 committed to a dividend policy of inflation-linked increases “for the foreseeable future”.
National Grid’s 5.2% yield may not have the wow factor of GVC’s 9.5% forecast yield. But it’s worth remembering that the market consistently values GVC on a low P/E and with an exceptionally high yield. The most likely reason for this is that investors believe the firm’s profits and dividends may not be sustainable.
Of course, the market consensus view about GVC could be wrong. It could be a cracking buy. However, online gambling isn’t exactly a stable, mature industry. Sudden changes in outlook are a fairly regular occurrence.
Investors choosing to dump National Grid in favour of GVC need to be very confident that GVC’s business model will continue to deliver strong results.
