Is this FTSE 100 high-yield stock too cheap not to buy?

Royston Wild considers the investment outlook of one FTSE 100 (INDEXFTSE: UKX) dividend bargain.

| 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.

Reflecting tough conditions on the UK high street, Marks & Spencer Group (LSE: MKS) can be picked up for next-to-nothing right now.

At current prices around 310p per share the FTSE 100 giant trades on a forward P/E ratio of 11.4 times, just a whisker off the widely-regarded bargain territory of 10 times or below.

Marks & Spencer’s steady share price decline that kicked off in the spring has also swelled yields. Therefore the 18.5p and 18.6p per share payouts forecast for the years to March 2018 and 2019 respectively result in a market-smashing 5.9% yield.

So is it worth a punt at these prices? I, for one, think not.

Here me roar… Please?

In fact, a case could be put forward that M&S is still not cheap enough given the company’s sustained failure to reignite its fashion sales, the company continuing to be left behind by its clothing rivals in terms of both style and price.

Its latest trading statement in January showed like-for-like group sales down 1.4% during the 13 weeks to December 30, with revenues generated from its clothing and homeware items slumping 2.8% on a comparable basis.

Marks & Spencer vowed back in November to become Britain’s “essential” clothes retailer, the company stating: “At all levels we are sharpening our ranges, to provide better choices with fewer options, and delivering contemporary wearable style to become more popular.”

But this is not the first time we have heard such grand plans from the shopping institution. And with conditions become tougher and tougher thanks to intensifying competition and growing strain on shoppers’ purses, these plans will be even harder to execute than ever before.

Reflecting these woes the City expects Marks & Spencer’s bottom line to continue shrinking — analysts expect the business to follow a 9% earnings drop in fiscal 2018 with a further 2% decline the following year.

And these estimates leave current projections looking just a little vulnerable. Dividend coverage through to the close of next year rings in at 1.5 times, some way short of the accepted safety benchmark of 2 times.

A better income bet

Those seeking inflation-beating dividend yields on a shoestring would be much better off shunning Marks and Sparks in favour of SThree (LSE: STHR), in my opinion.

While yields lag those of the Footsie retailer — predicted rewards of 14p and 15.1p per share for the periods ending November 2018 and 2019 respectively yield 3.7% and 4% — these figures can hardly be considered small beer.

Besides, dividend coverage ranges at a robust 1.9 times to 2.1 times through to the conclusion of next year. And SThree has no debt that could constrain future payments.

But it is the recruiter’s much sunnier profits outlook that really makes it a superior pick to M&S. Earnings rises of 12% for fiscal 2018 and 18% for the following year are currently anticipated, and it is not difficult to see why as business booms across the globe.

Gross profits from the US soared 18% last year, while in Continental Europe these jumped 9%, offsetting weakness in the firm’s UK and Irish markets. Given its terrific momentum, I reckon a forward P/E ratio of 14.1 times makes SThree an absolute steal today.

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.

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.

More on Investing Articles

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

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

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »