This FTSE 250 6%-yielder could harm your retirement savings. Here’s what I’d buy instead

This big FTSE 250 (INDEXFTSE:MCX) dividend could face the axe, says Roland Head.

| 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.

The market seemed moderately impressed by this morning’s full-year results from construction and outsourcing firm Kier Group (LSE: KIE). But to be honest, I think some of the 3% gain seen at the time of writing is probably relief that things aren’t worse.

In recent weeks, some investors have suggested that Kier could be the next Carillion — a total failure. Having looked at today’s figures, I think the comparison with Carillion is probably unfair. But I can see a number of areas which concern me.

Good news and bad news

Underlying revenue at Kier rose by 5% to £4.5bn last year, while underlying pre-tax profit rose 9% to £137m.

Should you invest £1,000 in Kier Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Kier Group Plc made the list?

See the 6 stocks

This increase in profits generated adjusted earnings of 116.7p per share for the year, a 9% increase on last year. The dividend will rise by 2% to 69p, giving the stock a tempting dividend yield of 6.5%.

The firm ended the year with a record order book of £10.2bn and a £3.5bn housebuilding pipeline. That’s the good news.

The bad news is that year-end net debt rose by 69% to £186m last year. Daily average net debt for the year was £375m, up from £320m in 2016/17.

Chief executive Haydn Mursell is now on a mission to cut debt. He’s targeting average net debt of £250m, and a year-end net cash position by June 2021.

The company is aiming to deliver a £20m increase in free cash flow in 2019/20, and hopes to raise £30m-£50m by selling non-core businesses. Capital expenditure is also expected to fall by about £25m this year, as a major IT upgrade programme has been completed.

A dividend cut may be needed

My concern is that despite these savings, the group may not generate enough cash to reduce debt and support the current dividend. My sums suggest that excluding acquisitions, free cash flow available to shareholders was just £11.3m last year. However, last year’s dividend cost £66m.

When I wrote about this stock nearly a year ago, I was fairly positive. My view has changed. Although Mursell may manage to cut debt and improve profitability, I think he may need to cut the dividend to achieve this goal.

My top construction pick

My favourite stock in the construction and services sector is Morgan Sindall Group (LSE: MGNS). It’s run by founder John Morgan, who retains a 10% shareholding in the business.

Although Morgan Sindall carries out a similar mix of work to Kier, the smaller firm benefits from a much stronger financial framework.

During the first half of 2018, Morgan Sindall’s revenue rose by 9% to £1,423m. Pre-tax profit rose 29% to £29.9m and the group ended the period with net cash of £97m. The firm maintained an average daily net cash balance of £113m throughout the half year.

Morgan Sindall’s stronger balance sheet means that it generates a much higher return on capital than its larger rival, despite having similar profit margins:

Company

Operating margin, 12 months to 30 June

Return on capital employed, 12 months to 30 June

Kier Group

3.0%

10.7%

Morgan Sindall Group

2.6%

19.1%

A higher return on capital suggests to me that Morgan Sindall is more likely to generate real wealth for shareholders, outperforming the market.

This stock currently trades on a forecast P/E of 9.5 with a safe-looking dividend of 3.7%. At this level, I rate Morgan Sindall as a buy.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Roland Head has no position in any of the shares mentioned. 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 the US stock market set to crash in April?

Panic about a looming stock market crash is spreading, but what could be the tipping point? And what can investors…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

As the stock market has a meltdown, I’m listening to billionaire Warren Buffett

Our writer has been following Warren Buffett in recent weeks by repositioning his portfolio to take advantage of the market…

Read more »

Investing Articles

How much would an investor need in an ISA for a £100k passive income?

Zaven Boyrazian breaks down how much investors need to put aside each month to potentially earn a six-figure tax-free passive…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

In my opinion, this FTSE growth stock looks set to soar over the next 5 years!

Our writer thinks this UK growth stock could benefit from the current excitement surrounding artificial intelligence applications.

Read more »

Investing Articles

0.45x EV-to-EBITDA: this is the cheapest UK stock, IMO

This UK stock has come under increasing pressure in recent weeks, but I don’t think it’s warranted. Here’s a closer…

Read more »

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »