Today I’m looking at two FTSE 250-listed retailers with 5%+ dividend yields and bargain basement valuations. I believe both stocks could be too cheap to ignore at current levels.
No place like home
Shares of homewares retailer Dunelm Group (LSE: DNLM) rose by 8% in early trade on Thursday, after the firm said sales rose by 5.1% to £268.2m during the 13 weeks to 31 March.
This sales revival is being driven by online growth. Like-for-like online sales have risen by 36.4% to £75.5m during the nine months to 31 March. The internet now accounts for 16% of all sales, up from 12% at this point last year.
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Shopping for homewares from the comfort of your sofa is obviously popular with Dunelm customers. But how is this shift affecting the group’s profits?
A very safe dividend yield
Today’s update shows us that like-for-like store sales rose by 2.8% during the first nine months of the financial year. Store performance appears to be stable, which should help to protect the group’s margins from being eroded by fixed store costs.
However, the group’s operating margin fell from 14.6% to 9.9% last year. Luckily, February’s half-year results show that this figure improved to 10.6% during the six months to 31 December. I’d hope to see this figure rise again over the full year, although it’s worth noting that this is already better than many other retailers can manage.
Indeed, I believe Dunelm remains a quality stock. Cash generation is good and debt levels are fairly low. The group’s forecast yield has dropped to 4.8% after today’s gains, but this payout should be covered 1.7 times by profits and looks very safe to me. Trading on 12.8 times forecast earnings, I rate the shares as a buy.
I’d buy more today
One of the larger positions in my personal portfolio is Dixons Carphone (LSE: DC). Shares in this electrical and communications retailer have lost 60% of their value since the end of 2015.
My view is that this sell-off has gone too far. Although market conditions are challenging and the group faces tough competition on pricing from big online retailers, I rate the shares as one of the best buys in the retail sector.
Why I’m keen
Dixons Carphone has recently gone through a period of management change. The arrival of new chief executive Alex Baldock has been followed by a number of other departures among senior management.
Mr Baldock has previous experience in online retail and asset finance. These should both prove relevant as the group grows its online sales and its Your Plan customer credit operation, which has already approved £1.6bn of credit for more than 500,000 customers.
I suspect the firm’s future may involve customers paying a monthly charge for appliances, rather than buying them. In a similar way to the new car market, this would allow customers access to the latest devices without having to pay up front. This could be a good way for the group to develop a loyal customer base and enjoy additional profits from selling finance.
In today’s market, Dixons Carphone shares trade on 7.6 times forecast earnings with a dividend yield of 5.9% that’s covered twice by earnings. Debt levels are very low and cash generation remains good. In my view this is an offer that’s too good to ignore.
