A 10-year pay squeeze could spell trouble for these big retail stocks

Discretionary spending is facing a squeeze, so should you keep away from upmarket retailers?

| 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.

Our chance of retaining access to the EU’s open market without allowing free movement of people seems increasingly remote, and that’s surely going to harm our businesses.

The prospect for workers’ pay over the next decade is looking more and more grim by the day, after the Institute for Fiscal Studies has predicted a 10-year pay squeeze with real incomes set to be lower in 2021 than they were in 2008.

The more I reflect on the EU referendum outcome, the more I think of turkeys voting for Christmas. Still, I guess that’s democracy.

And one thing I definitely would not be doing now is investing any money in shares that are dependent on discretionary spending.

A favourite, fallen

It seems like forever that Marks & Spencer (LSE: MKS) has been struggling to turn itself back into the growing high street giant it once was, and it really hasn’t been managing it. The erstwhile favourite is simply failing to adjust to today’s online-driven fashion market.

That was hammered home by first-half results delivered earlier this month, which showed yet more big falls in underlying pre-tax profit and earnings per share (EPS). Free cash flow fell, debt rose, and the interim dividend was pegged at 6.8p per share.

Analysts are forecasting a full-year dividend yield of 5.9% even against the background of a mooted 14% drop in EPS, but that would be covered only around 1.5 times by earnings and I see it as unsustainable — for M&S’s dividends to be sustainable long term, I’d be wanting to see cover of at least around two times, in line with historical levels.

Marks and Spencer has failed to grow its EPS over the past five years in a relatively benign trading environment, and the probable decade-long Brexit-driven brake on economic growth we have in store is not going to provide any respite.

The share price has plunged by 33% in the past 12 months, yet that still leaves the shares on a prospective P/E of over 11 — and that’s not bargain territory for a company failing to turn itself around. It’s a bargepole share for me.

Not faring as badly?

Debenhams (LSE: DEB) shares are on a much lower prospective P/E rating, of just 8.3. Having said that, we’ve seen a big decline in EPS since 2012, and forecasts for a further 12% drop this year suggest the firm’s struggles are far from over.

At full-year results time last month, Debenhams reported net debt of £279m. For a company with a market cap of £700m that’s not insignificant, and it implies that the underlying business is valued closer to a P/E of around the market average of 14 — nowhere near bargain territory.

For now the dividend looks set to yield 5.9% this year, but that’s solely because the share price has lost 30% in the past 12 months and 53% since 2012’s peak in October that year. In cash terms it’s been flat at around 3.4p for years while cover has been declining.

The real downer for me is looking at Debenhams’ goods and prices. I browse in my local branch quite often and it sells some good stuff, but the last time I bought anything there was several years ago — because it’s just too expensive. It looks to me like it’s priced for those with pretensions to higher status, and that seems like a dying breed.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

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

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »