Dividends paid by UK stocks rose by 1.6% to £24.9bn during the third quarter, despite £2.2bn of dividend cuts during the period.
Figures from the latest Capita Dividend Monitor report show that the weaker pound pushed up the total value of UK dividends by £2.5bn during Q3. But it wasn’t all good news. If we ignore currency effects, then dividend payouts actually fell by 0.1% during Q3.
The only real bright spot was the mid-cap sector of the market, where dividends rose by 4.9%. In this article, I’ll look at two FTSE 250 dividend stocks, Carillion (LSE: CLLN) and Restaurant Group (LSE: RTN). I’ll explain why I believe both could be a good buy in today’s market.
Don’t ignore this 7.6% yield
Infrastructure and facilities firm Carillion seems to have fallen out of favour with investors this year. The firm’s shares are down by 19% so far in 2016, despite solid financial results and the widespread expectation that public infrastructure spending could rise.
Carillion shares now look extremely cheap, with a 2016 forecast P/E of 7 and a prospective yield of 7.6%. This year’s dividend should be covered twice by earnings per share, so doesn’t look obviously stretched.
Too good to be true?
Is Carillion’s low valuation and high yield a warning of problems to come? There are certainly some risks.
Around 60% of Carillion’s profit comes from outsourced support services work. The remainder comes from construction work on large infrastructure projects in the UK, Canada and Middle East.
Other companies operating in these sectors — such as Serco, G4S and Balfour Beatty — have experienced big problems with underperforming contracts over the last few years. Carillion’s exposure to government spending and exchange rates could also affect future profits.
Rising debt levels could also become a problem, although management expects cash flow to improve during the second half, reducing borrowing requirements.
Overall, my view is that Carillion could be an attractive contrarian buy at current levels. I’ve added the stock to my own watch list.
This turnaround story yields 4.8%
Turnaround stories often involve painful dividend cuts. But Restaurant Group has avoided this fate so far.
The company, whose main asset is the Frankie & Benny’s chain of family restaurants, has always boasted strong free cash flow. Despite a 3.9% fall in like-for-like sales during the first half, Restaurant Group reported free cash flow of £35.8m. This comfortably covered the interim dividend payout of £13.7m.
The group’s falling sales appear to be the result of weak management and complacency. In its interim results, Restaurant group admitted that poor menu testing had led to popular dishes being dropped. Underperforming restaurants are now being closed and the business is tightening its focus on its core family market.
A new chief executive, Andy McCue, has been appointed to lead the group’s turnaround. Mr McCue was previously the boss of bookmaker Paddy Power, which delivered big gains for investors before merging with Betfair earlier this year.
Restaurant Group shares currently trade on a forecast P/E of 12 and offer a prospective yield of 4.8%. Although there’s a risk that Mr McCue will discover the situation is worse than expected, I believe that the current valuation offers a good chance to buy into this turnaround story.
