Why I’d still buy these 3 FTSE 250 stocks that could cut their dividends

G A Chester argues dividend risk is no reason to pass over the value on offer at these three FTSE 250 (INDEXFTSE:MCX) stocks.

| 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.

Dividends could be under pressure this year at FTSE 250 firms Centamin (LSE: CEY), easyJet (LSE: EZJ) and Greene King (LSE: GNK). However, even in the face of potentially reduced payouts, I’d be happy to buy these three stocks. Let me explain why.

Down the mine

Gold miner Centamin owns a global Tier 1 mine in Egypt, and has a strong balance sheet, with cash of $332m and no debt. Its profits can be fairly volatile year to year, because they’re very much geared to the price of gold. The dividend also dances to a disjunct melody, as you can see in the summary of payouts for the last five years below.

Year

2014

2015

2016

2017

2018

Dividend per share (US cents)

2.86

2.94

15.5

12.5

5.5

City analysts are forecasting no advance in earnings or dividends for the current year, putting Centamin on a price-to-earnings (P/E) ratio of 25, with a dividend yield of 3.7%.

However, the price of gold (and Centamin’s shares) have rallied in recent weeks. With there being good reasons for the strengthening of gold to persist, I think we could see some upgrades to Centamin’s earnings and dividend forecasts.

Either way, though, I see the company as a good choice for investors seeking both some exposure to gold and an overall decent, if annually variable, income.

Down the runway

While Centamin’s profits are directly impacted by the price of gold, easyJet’s are indirectly impacted by the price of oil. This, together with other things outside the budget airline’s control (such as the weather), makes for variable annual profits — and dividends, as you can see below.

Year

2014

2015

2016

2017

2018

Dividend per share (pence)

45.4

55.2

53.8

40.9

58.6

City analysts are forecasting a hefty drop in earnings and dividends for the current year, with the latter pencilled in at 44p. At a share price of 865p, the forward P/E is 10.2, and the prospective dividend yield is 5.1%.

The valuation looks highly attractive to my eye. Brexit uncertainty and competition concerns are weighing on investor sentiment, but I’m expecting easyJet — helped by what it describes as its “sector leading balance sheet strength” — to prove resilient through this period, and deliver strong returns in due course for shares buyers at the current level.

Down the pub

In contrast to Centamin and easyJet, brewer and pubs group Greene King had long been cherished by investors for a steadily rising annual dividend. However, as you can see below, the sequence of increases stopped last year, with the board maintaining the payout at the same level as the prior year.

Year

2014

2015

2016

2017

2018

Dividend per share (pence)

28.40

29.75

32.05

33.20

33.20

City analysts are expecting no advance in earnings or dividends when Greene King releases its latest annual results on Thursday, giving a P/E of 9.2, and yield of 5.7% at a share price of 580p.

There’s been some speculation management could actually reduce the dividend this year, because the company carries quite a hefty debt burden. I’ve expressed concern about the debt before, but with the shares now trading significantly lower, the valuation is looking increasingly tempting in what I consider to be an attractive sector for investors.

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.

G A Chester 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

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »