A FTSE 250 dividend stock yielding 9.5% that is absurdly cheap right now

Rupert Hargreaves looks at the highest dividend yield in the FTSE 250 (INDEXFTSE: MCX).

| 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.

Dividend yields of nearly 10% are a rare phenomenon. Usually, if a yield reaches this level, it is a signal from the market that the payout is unsustainable. And generally, it is only a matter of time before the dividend is slashed after rising into the high-single-digits.

However, today I’m looking at one FTSE 250 dividend stock with a dividend yield of 9.5% that seems to be entirely sustainable.

Hated by the market

N Brown (LSE: BWNG) has to be one of the market’s most hated stocks right now. Over the past 12 months, shares in the company have lost more than 50% as investors have run for the hills. But despite investors’ negative view of the enterprise, fundamentally, the business appears sound.

As my colleague Royston Wild pointed out at the end of July, N Brown’s sales expanded 0.4% for the three months to the end of May. This growth is hardly show-stopping, but the enterprise is still growing. Internet sales of its so-called Powerbrands like Jacamo and JD Williams rose 9% in the last quarter. 

I’m not the only one who believes that N Brown’s underlying business appears sound. After the May trading update, City analysts went back to revise their growth forecasts for the company. Before the update, earnings were expected to remain flat in 2018, now, however, growth of around 6% is predicted. A similar expansion is pencilled in for 2020.

This growth should support the firm’s dividend. Based on current forecasts, the 14.3p per share payout will be covered 1.6x by earnings per share (EPS). In my view, this level of cover is more than enough to maintain the payout, with room to spare. 

What’s more, after recent declines, N Brown is trading at a forward P/E of just 6.5. I reckon the market is being too pessimistic here and N Brown is too cheap at current levels. Indeed, if trading improves, the shares could double from current levels. 

Costly investment 

One FTSE 250 company that I am less enamoured by is WH Smith (LSE: SMWH). It has been on a staggering run of growth over the past decade with EPS growing at an average annual rate of 13%. 

The problem is, today it looks very expensive. The stock currently trades at a forward earnings multiple of 17.5, a multiple of that in my view is more suited to a fast-growing tech business rather than a retailer. To be able to justify a P/E of 17.5, you have to believe that it can continue to grow earnings at a double-digit rate for the next few years. City analysts don’t think this is likely. The City is predicting EPS growth of just 5% for 2018 and 7% for 2019. 

I’m concerned that these figures are hiding a more worrying trend. Growth is stagnating despite the company’s aggressive overseas expansion plan. WH Smith opened eight new stores in Madrid airport’s Terminal 4 in mid-August and six stores are planned in Rio de Janeiro.

For a company that is continually breaking into new international markets, I would expect faster bottom-line growth. The figures indicate that growth at home may not be as strong as management would like.

With this being the case, I reckon it is sensible to avoid the shares for the time being as the high valuation does not leave much room for disappointment.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended WH Smith. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »