Even though trading at The Restaurant Group (LSE: RTN) has shown green shoots of recovery recently, I reckon investors should resist the temptation of piling back in as the eateries giant’s turnaround story remains fraught with danger.
The Frankie and Benny’s owner flipped higher last month after news that like-for-like sales edged down 1.8% during the 20 weeks to May 21. While far from impressive at face value, it led to chatter that the restructuring strategy is beginning to pay off but underlying sales fell by a more painful 3.9% in the 12 months to January.
But investor enthusiasm fizzled out almost immediately as fears over the structural woes facing the business resurfaced. With the bulk of The Restaurant Group’s sites being located in or around Britain’s retail parks, the company is likely to see footfall keep decreasing as tough economic conditions cause shoppers to stay at home. And the rapidly-growing internet shopping phenomenon is pulling even more potential diners away from its doors.
And increasing competition puts the recovery plan in even more jeopardy.
Dividends diced
The Restaurant Group was forced to scythe the dividend in the year to January 2017 as earnings swung 19% lower, the company paying out 15.84p per share versus 17.4p in the previous year. And with City brokers expecting another 19% decline in the current fiscal period, another dividend reduction, to 15.4p, is currently being bandied around.
While this figure still yields a healthy 4.6%, flimsy dividend coverage of 1.4 times — some way below the widely-regarded safety benchmark of two times or above — makes me more than a tad wary that current payout projections will be met.
I reckon investors should be prepared for a much more painful payout cut than is currently predicted.
Dangerous driller
I also believe risk-averse share pickers should give Wood Group (LSE: WG) a wide berth, despite predictions of meaty near-term dividends.
The oilfield services play is expected to raise 2016’s dividend of 33.3 US cents per share to 33.4 cents in the current period, meaning it sports a market-beating 4% yield.
The number crunchers see no return to earnings growth any time soon however, and Wood Group is expected to follow last year’s 23% earnings drop with an additional 17% fall in the current period. As a consequence, dividend coverage clocks in at just 1.6 times.
Regardless of whether or not Wood Group’s proposed merger with Amec Foster Wheeler is hampered by the Serious Fraud Office probe into Unaoil — Wood has launched an internal review into its own dealings with Unaoil, while Amec has been asked to provide information to the SFO on its history — the murky state of the oil market would discourage me from spending my own investment cash right now.
Brent crude prices have receded to their lowest since November below $45 per barrel this week, and I expect the downtrend to continue as returning US shale producers keep the oil glut in business. In this environment, I would expect demand for Wood Group’s services to remain subdued, and reckon earnings are in danger of stuttering lower well beyond this year.
