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2 high-yield stocks I believe are still worth buying

Image: McColl's. Fair use.

Shares of collagen sausage casing maker Devro (LSE: DVO) are up over 60% since bottoming out at around 140p in December of 2016. But even after this impressive rally and a valuation of 18.2 times forward earnings, I believe the company is still worth buying for its growth prospects and a very nice 3.8% dividend yield.

Devro’s rally is due to the company recovering from a series of profit warnings that hit late last year due to cost overruns and production problems with its two new factories in China and the USA. These problems briefly ignited fears amongst investors that the company would breach its debt covenants, but thankfully the company is back on track.

In the half year to June, revenue rose 11% year-on-year (y/y) to £125.2m and underlying EBITDA leapt 16.7% to £30.8m. The company is still having teething problems with its US factory but with that facility up and running and the Chinese factory targeting full capacity by year-end, I expect sales and profits to continue growing rapidly.

With start-up costs for the new factories decreasingly rapidly, the company’s balance sheet is also much improved with the net debt/EBITDA ratio down to 2.4 times at the end of June. This has led analysts to forecast the company’s first dividend hike in over four years with a 9.02p full-year dividend pencilled in. This is a very realistic option as the interim payout of 2.7p was well-covered by rapidly rising statutory earnings per share of 5.5p for the period.  

The global market for collagen casings continues to grow in the mid-single-digits every year and Devro’s brand new factories will allow it to gain share in this growing market by offering customers more complicated products than competitors and at a better price. With good growth prospects, a turnaround that’s shaping up to be very robust and a great dividend yield, I reckon Devro is still a great stock to own for the long term.

A local option offering up a great dividend

Shares of convenience store operator McColl’s (LSE: MCLS) have also been on a tear with their value up over 60% in the past year. Yet even after rising so rapidly they still look very attractive to me at 16.6 times forward earnings with a 3.74% dividend yield.

The key for McColl’s has been expansion through acquiring 298 Co-op convenience outlets, plus steady and growing like-for-like sales (LFL) due to changing consumer habits, and a shift towards offering fresh food at its locations. In Q3, 0.7% LFL growth and the addition of the new stores led to revenue rising 31.1% y/y.

Looking ahead, there’s solid potential to further boost LFL sales growth by refurbishing tired newsagents into bright, cheery local food and convenience outlets. In Q3, sales from newly acquired and refurbished shops rose 2.6% on a LFL basis, which bodes well for the rest of the estate as the renovation programme is expanded.  

This programme isn’t cheap but group profitability is still rising with EBITDA up to £16.5m in H1. With net debt at the end of H1 up to £110.8m due to acquisition costs, the company’s dividend will probably remain around its current 10.2p per year for the time being. But with top line and bottom line growth, a decent valuation and an attractive yield, I still think McColl’s is worth considering.

But if McColl's is simply too expensive for you, I recommend reading the Motley Fool's free report on one top small-cap trading at only eight times earnings. And this value investor favourite also offers surprising growth prospects with earnings increasing by double-digits four years in a row.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. 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.