Why I would sell this FTSE 100 stock for this 8% yielder

Royston Wild looks at a FTSE 100 (INDEXFTSE: UKX) dividend in peril, and another blue-chip set to keep delivering delicious shareholder returns.

| 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.

Most eyes have been on Royal Bank of Scotland on Friday following all-new trading details, and rightly so — the semi-nationalised bank announced today that it had chalked up profits for the first time in a decade.

But fellow Footsie share Pearson (LSE: PSON) also impressed the market with fresh news on its own turnaround story.

Underlying revenues at the educational materials specialist may have ducked 2% in 2017, to £4.5bn, but this was an improvement from the 8% fall chalked up in 2016. The FTSE 100 business said that the fresh fall was “due to a decline of 4% in North America partly offset by stabilisation in Core and Growth.”

However, thanks to a lack of impairments this time around in its North American marketplace, Pearson was able to swing back into profit to the tune of £421m, a huge departure from the £2.6bn loss punched in the previous year.

Pearson was, as expected, forced to take the hatchet to dividends though, resulting in a full-year payout of 17p per share versus 52p in 2016.

Troubles remain

The London business has thrown the kitchen sink at resuscitating its troubled bottom line, and its efforts to digitalise its operations are showing signs of early progress. US higher education digital courseware revenues rose 9% last year.

Meanwhile, in more good news, Pearson declared that streamlining at the business is also “making faster progress than expected in some areas.” And so it confirmed that it remains on track to deliver £300m worth of annualised cost savings by 2020.

But the company still has a long way to go before it can proclaim its recovery plan a success. Indeed, it is touting a further fall in adjusted operating profit in 2018, to £520m-£560m from £576m last year and £635m the year before that, and this is little surprise as the crushing impact of falling demand for its print textbooks in the US looks set to persist in 2018 and beyond.

City analysts are predicting a 7% earnings decline this year, but for Pearson to bounce back with a 17% profits improvement in 2019. I remain to be convinced however, and reckon a forward P/E ratio of 14.1 times does not reflect the hard yards it still has to make to start generating meaningful earnings growth.

Safe as houses

I would be far happier to sell Pearson and to splash this cash into Barratt Developments (LSE: BDEV).

A slowing UK economy, rising construction costs, and uncertainty over the government’s Help To Buy scheme means that Barratt is not without risk itself. That said, I believe Barratt is on much safer footing than its FTSE 100 comrade, as the painful housing shortage that is driving demand for new-build properties is unlikely to disappear any time soon.

And so profits are likely to continue booming across the housebuilding sector, a view that is also shared by City analysts. Barratt itself is anticipated to report earnings growth of 5% and 6% in the years to June 2018 and 2019 respectively, feeding through to predictions of further dividend growth.

Last year’s 41.7p per share dividend is expected to rise to 43.3p this year, and again to 44.8p in fiscal 2019. Consequently Barratt boasts enormous yields of 7.9% for this year and 8.1% for next year.

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.

Royston Wild owns shares in Barratt Developments. 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

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »