Buying unloved income stocks can sometimes be a good way to lock in future profits. I’ve been taking a look at these popular retailers to see if they deserve a slot in my portfolio. I see one in particular as attractive right now.
Marks and Spencer: a contrarian buy?
Marks and Spencer Group (LSE: MKS) has been a turnaround stock for as long as I can remember. But there are signs of improvement. Sales during the 12 months to April were 7% higher than the year before the pandemic. Profits were nearly 30% higher.
Management has updated the M&S store network and reduced the level of discounting. Online sales have risen as the company’s internet offering has improved significantly.
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However, management turnover is a potential concern for me. Chief executive Steve Rowe left earlier this year, while finance boss Eoin Tonge announced his departure last week. Pressure on consumer spending is also a risk.
In my view, the best that investors can hope for is slow, steady progress. I think that’s why M&S shares have fallen by nearly 40% so far this year.
But fortunately for new buyers, the shares now trade on a modest eight times earnings, with a forecast dividend yield of 4.6%.
M&S isn’t the first income stock I’d buy today, but I do think the shares look reasonably priced and could deliver attractive returns.
Greggs: cheap eats are still popular
Sales at bakery chain Greggs (LSE: GRG) rose by 16% in the 10 weeks to 14 May compared to the same period last year. It seems consumers still want its cheap, tasty snacks.
The Newcastle-based business said that sales in larger city centres and office locations are still lagging behind. But it added that sales in transport locations are rising fast. Greggs is confident enough to have opened 49 new shops since the start of 2022, closing only six.
However, despite its strong performance so far, management has cited rising costs as a concern. The company also expects consumer spending to come under greater pressure during the second half of the year.
I reckon that Greggs’ products are the kind of cheap treats people will continue buying. But with the shares trading on 16 times earnings and offering a yield of only 3.3%, I think the shares are probably priced high enough for now.
Halfords: is this 5% yield safe?
Cycle and motoring retailer Halfords (LSE: HFD) triggered a price slide in June when management warned of slowing cycling sales and said profits would fall this year.
According to chief executive Graham Stapleton, pre-tax profit could drop by around 20% to £65m-£75m this year. That’s a sharp reversal from the bumper performance seen over the last couple of years, when Halfords benefited from the pandemic boom in cycling and staycations.
Broker forecasts suggest a dividend of 9p per share this year. This would give a dividend yield of 5.3% and should be covered three times by earnings, giving a decent margin of safety.
The main risk I can see is that the UK will suffer a deeper recession than expected. But on balance, I think Halfords could be a decent buy at current levels.
