2 high-risk high-yielders I’d definitely sell

Royston Wild discusses two big-yielding stocks investors should avoid.

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Investors have been piling back into Pearson (LSE: PSON) in Friday trading like there’s no tomorrow, the stock last 14% higher from Thursday’s close and dealing at three-and-a-half-month peaks.

Stock pickers have pounced on news that Pearson plans to give its restructuring plan a shot in the arm with more cost-cutting.

The firm — which has already planned the sale of Penguin Random House to mend its balance sheet, and has also stripped out £650m worth of costs during the last four years — revealed that it has “identified a further significant additional cost saving opportunity, the largest parts of which are in general and administrative expenses and in North America.”

The move will see Pearson make an extra £300m worth of annualised costs by the end of 2019, it said.

On top of this, Pearson said that it was launching a strategic review of its school coursebook business in the States, the firm commenting that the division “has seen a slow pace of digital adoption in basal courseware, high capital intensity and a challenging competitive and market environment.”

A long road ahead

And Pearson scored a hat-trick in end-of-week business after announcing a solid start to 2017, advising that underlying sales rose 6% during January-March.

But despite the positive reception to today’s release, Pearson still faces one hell of a battle to get profits moving back in the right direction.

Indeed, Pearson commented that “the underlying market pressures we have previously described in this business are still expected to impact gross sales, primarily in the second half.” The company affirmed its full-year operating profit guidance of between £570m and £630m for 2017, down from a reported £635m last year.

While restructuring efforts should ease the pressure on the bottom line, Pearson faces massive structural challenges like falling enrolment rates in higher-education, rising competition, an increase in the rentals market, and the rapid growth of digital learning.

The publisher has already warned that it intends to rebase the dividend in light of these pressures, and the City expects a payout of 26.8p per share in 2017. While this would mark a sharp downgrade from last year’s 52p reward, the projection still yields a solid 3.6%.

I still reckon shrewd investors should shun Pearson’s large yield however, given the scale of required restructuring at the business, and the probability of prolonged earnings woe (dips of 16% and 1% are expected by forecasters for 2017 and 2018 respectively). I reckon there are far-less-risky FTSE 100 dividend shares out there.

Off the chain

A murky outlook for Britain’s retail sector also encourages me to steer clear of Halfords Group (LSE: HFD) for the time being, despite similar predictions of chunky near-term dividends.

With earnings pressure mounting, the number crunchers expect the business to reduce a predicted 20.3p per share payout for the year to March 2017 to 17.5p this year. And let’s not forget that it will soon lose its CEO Jill McDonald as she moves to M&S.

Investors should shun a 4.7% yield in my opinion as, not only does a backcloth of rising inflation sully the sales outlook, but other items like a cyclical slowdown in new cycle sales bites.

Halfords is expected to follow a predicted 9% earnings fall in 2017 with a 2% drop in the present fiscal period. And I can see the retailer’s profits woes enduring for some time yet.

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.

Royston Wild has no position in any 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.

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