At first glance, Walker Greenbank (LSE: WGB) looks to be a great income investment. The stock supports a dividend yield of 3.5%, and the payout is covered 3.2 times by earnings per share, leaving plenty of headroom if profits fall or for management to increase the distribution further.
What’s more, the company has a relatively stable balance sheet with net gearing of only 9% and interest cover of 16.1 times.
However, as today’s full-year results for release from the luxury interior furnishings group shows, Walker is facing significant business headwinds that will limit its growth going forward.
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Another warning
Today the company reported a 20.2% jump in adjusted underlying profit before tax and 6.2% increase in earnings per share, mainly thanks to the acquisition of Clarke & Clarke, completed last year.
With earnings rising, management has decided to hike the final dividend by 20.3% giving a total dividend for the year of 4.4p. But despite these upbeat headline figures, a more troubling trend is emerging in the underlying business.
Following a profit warning in November, the company has today announced another warning on growth, noting alongside results that trading in the current financial year “reflects a difficult marketplace, particularly in the UK.” The statement goes on to say that “in the first nine weeks of the current financial year, brand sales were down 8.3% in the UK.”
Unfortunately, international sales are not doing much to pick up the slack either. Overseas sales declined 6.1% in reportable currency. These figures reflect broader industry trends, and it is unlikely, in my opinion, that the business is going to see a sudden uptick in demand any time soon.
With this being the case, despite Walker’s attractive valuation of only 8.7 times forward earnings, I would avoid it in favour of growth champion Howden Joinery (LSE: HDWN).
A unique business model
Howden is not immune to the headwinds affecting the broader retail industry, but it is better placed, in my opinion, to weather the storm.
As I pointed out at the end of January, Howden’s business model is unique in that each of the group’s depots is run as an individual business where managers receive a significant share of the profit. This incentive model has helped the company grow profitably without over expanding or becoming involved in any costly price wars. It has also helped the business retain key talent.
By putting staff in control, Howden has seen its net profit grow at a compound annual growth rate of 17% for the past five years, and its dividend to shareholders has increased at a rate of 30% per annum over the same period. Meanwhile, cash on the balance sheet has risen from £95m to just over £241m, enough to fund dividend distributions for three-and-a-half years if profit evaporated overnight.
And while Walker is struggling in the current environment, at the beginning of March, Howden announced that the robust trading it had seen in 2017 (revenue growth of 7.1%) had continued into 2018.
So overall, Howden looks to be the better income and growth investment even though shares in the company are slightly more expensive. The stock currently trades at a forward P/E of 14.3 and yields 2.6%. Nonetheless, in my opinion, it’s worth paying a premium to profit from its outperformance.
