One 7.7% yielder I’d buy alongside this growth monster

This duo offers the perfect mix of income and growth.

| 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.

Marstons (LSE: MARS) and City Pub (LSE: CPC) are two fairly similar businesses at different stages in their lives. Marstons is the more mature pub operator with over 1,600 pubs and five breweries. Meanwhile, City Pub operates 34 pubs (as of year-end December 2017). 

As one of the largest pub operators in the UK, Marstons’ growth is nothing to get excited about. Over the past six years, revenue has risen at a compound annual rate of 6.6%, but costs have increased faster. The group’s operating profit margin has declined from 18.7% in 2012 to 17% for 2017. City analysts have pencilled in a 6% decline in earnings per share for 2018, as costs continue to rise following the increase in the minimum wage earlier this month. 

In my opinion, City Pub is better placed to weather rising costs due to the nimbleness that usually comes with smaller companies. More prominent businesses like Marstons tend to have bloated cost bases that are difficult to rationalise, but smaller companies typically have a tighter grip on costs and can move faster to offset cost pressures that threaten profit. 

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Rapid growth 

Today’s results from City Pub go somewhere to affirming this view. For the year to the end of December, the company saw revenue growth of 35% to £37.4m, and adjusted profit before tax jumped 102% to £3.2m, although after excluding the impact of one-off exceptional items, the group reported a loss of £0.7m, down from last year’s profit of £0.4m. 

Digging into the figures, it seems the bulk of the exceptional costs booked for the period were related to City Pub’s IPO last year, which cost £1.9m. There’s also a charge of £852k for pub opening costs and £450k charge for the impairment of a pub site. As the business continues to expand, pub opening costs will continue to weigh on profitability. However, expansion costs should be more than offset by the additional profitability these new pubs contribute. 

It currently has seven new pubs in development, which will increase the size of its pub portfolio by 20%. City analysts believe these new openings will help the group grow earnings per share to 7.2p by 2018. Management is so optimistic about the future today it has announced a 50% increase in City Pub’s dividend to 2.3p. 

A price worth paying? 

With earnings per share set to grow nearly four-fold between 2016 and 2018, it’s no surprise shares in City Pub trade at a high valuation of 22.2 times forward earnings. Still, if the company can achieve the growth analysts are predicting, in my opinion, it deserves this high multiple. 

On the other hand, shares in Marstons are more appropriately priced. The stock trades at a forward P/E of 6.9 and supports a dividend yield of 7.7%. The yield is so high because investors seem to be worried about the company’s ability to be able to navigate higher costs and falling discretionary incomes. However, so far management has done an excellent job of managing the hostile retail environment, and with the dividend covered twice by earnings per share, it looks as if the payout is here to stay for the time being.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won’t want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we’re giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Rupert Hargreaves owns no share 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

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »