Should you be tempted by these high-yield stocks?

Why investors should be wary of the dividend safety from these two high-yield stocks.

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.

FTSE 250 satellite company Inmarsat (LSE: ISAT) has been going through a difficult patch as the capacity glut in the sector stokes competition and weighs on pricing.

The launch of high-bandwidth satellites in recent years has brought more capacity online than ever, but demand has not kept up with its pace due to external headwinds, which include an under pressure maritime environment and weakness in business aviation

Amid these concerns, investors have become increasingly concerned that its dividend could be jeopardised. Dividend cover, a simple gauge of safety which is calculated by simply dividing the company’s net income by the amount of dividends paid to shareholders, was only 1.2 times for the company last year.

Looking ahead, cover could fall below 1 times in the coming years as competition continues to hurt margins. This would mean the company would have to borrow money or sell assets to maintain the payout, which may become difficult as the group’s costly capital spending plans and its indebted balance sheet would eat into free cash flows at a time when profits are shrinking.

Better-than-expected revenues

The company today reported a better-than-expected 4.8% increase in its third quarter revenues, allowing Inmarsat to deliver faster growth than many of its competitors. This was mostly down to a 50.1% jump in revenue from its aviation unit, which reflected an increase in the number of installed aircraft and higher customer airtime usage.

Despite the impressive revenue figures, the group’s EBITDA was 6.5% lower, at $191m, reflecting the prioritisation of revenue growth over margins. Additionally, management narrowed expectations for full-year profit to a range of between $1.23bn and $1.28bn, from $1.2bn to $1.3bn.

Looking ahead, CEO Rupert Pearce said that although “markets remain challenging and the outlook continues to be difficult to predict”, he continues to be “confident” about the longer-term prospects.

But judging by the share price reaction today, investors don’t seem convinced. Although Inmarsat shares initially rose as much as 6% on the revenue beat in early trading, they’ve since fallen to an 8% decline by mid-afternoon.

Uncertain outlook

Elsewhere, transport group Stagecoach (LSE: SGC) is warning of an uncertain outlook as lower fuel prices and recent terror attacks hit demand for bus and rail services. The company is also in talks with the government over its contract to operate the East Coast Main Line after exceptional charges linked to the troubled franchise saw profits at the company tumble last year.

Looking ahead, its outlook may be less bleak. Although passenger numbers aren’t expected to rebound any time soon, the longer-term fundamentals for public transport remain intact. Factors ranging from population growth, increasing urbanisation, congestion and trends in government policy suggest the recent weakness in passenger demand is just a setback in the longer-term structural growth story.

And in the short run, Stagecoach is not rudderless — it is in a stronger position than its rivals to raise prices on its UK bus services as it has lower average bus fares than its competitors. Some relief may also come from its negotiation of its East Coast contract following delays caused by infrastructure work, which could also lift earnings in the medium term.

As such, I reckon Stagecoach is a better high-yield play. Although its dividends are far from guaranteed, the company seems to me in a better position than Inmarsat to sustain dividend payouts at current levels.

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.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. 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

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »