Last year, Stagecoach (LSE: SGC) hit the headlines for all the wrong reasons. It was announced the government was terminating its East Coast rail joint venture with Virgin Holdings.
The decision cost the company just over £86m, but it was the reputational cost that hurt more than anything else.
Before the problems with the franchise first emerged, the stock was changing hands for more than 400p. It slumped to 130p at the end of March last year and has since struggled to move much higher.
Making a comeback
After the East Coast rail debacle, there’s been fears Stagecoach’s reputation with the government would never recover. However, as it turns out, these fears might have been overblown. Today, the company announced that the Department for Transport (DfT) has agreed to extend its franchise on the East Midland line. The contract extension is only until 18 August, but this is longer than analysts have been expecting.
The company expects to earn a “modest profit” under the revenue-sharing agreement inked with the DfT.
Dividend champ
Rail is just part of the Stagecoach empire. The rest of the business is humming along nicely. Management recently agreed to sell its North American division to a private equity buyer for $207m. The proceeds of this will be used to reduce the debt which, in my opinion, will make the enterprise a much more attractive income investment. Indeed, when it comes to income, Stagecoach stands out to me as an FTSE 250 income giant.
Even though the City has pencilled a decline in earnings per share of 20% between now and 2020, the fact that the payout is covered twice by earnings per share means that even after this decline, Stagecoach’s dividend appears safe.
The stock currently supports a dividend yield of 5% and, right now, you can buy this income for a P/E of just 7.8. That’s why I am eyeing up the company today.
Unique business
Another unloved FTSE 250 income stock I think is worth your further research time is Halfords (LSE: HFD).
Investors rushed to sell this company after it issued a shock profit warning at the beginning of 2019. Management informed investors it now expects underlying pre-tax profit to fall around 15% year-on-year, after a rough Christmas.
At first glance, this forecast seems disappointing. But, as my Foolish colleague Roland Head recently pointed out, Halfords’ debt is low and the group’s cash generation has historically been quite strong. On top of this, management made a fresh commitment to the dividend back in September, so I’m confident that the dividend, which currently stands at 18.2p per share, is here to stay.
With this being the case, I would buy into Halfords’ current dividend yield of 7.8%. A P/E of just 9.7 makes the opportunity even more attractive, in my view.
Of course, if the retail environment gets much worse and earnings slump, there’s a chance the dividend could be cut. But I think Halfords has what it takes to weather the storm because its two key markets are motoring sales and outdoor activities which, unlike retail, don’t suffer the same vicious competition and thin profit margins. What’s more, Halfords is the market leader for both of these product lines.
