These two 5%+ yielders are ridiculously cheap

With P/E ratios under 10 and dividend yields over 5% are these two stocks great buys?

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DFS sofa

Image: DFS: Fair use

Shares of retailer DFS Furniture (LSE: DFS) fell off a cliff last month when the company issued a profit warning and also warned of dampening consumer confidence across the UK. After this plunge, shares of the firm now trade at 4.3 times trailing earnings and offer up a whopping 5.35% dividend yield. Is now the time to buy?

Well, for income investors who are confident that the state of the economy isn’t all that bad the stock may not be a bad bet. Last year shareholder payouts totalled 11p per share and were safely covered by underlying earnings per share of 23.7p. Furthermore, at half-year results in March, the company announced a special 9.5p per share capital return due to good cash generation and net debt falling to 1.42 times EBITDA.

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Of course, the profit warning in June does muddy the waters a bit. The company now expects full-year EBITDA to be in the range of £82m-£87m, which is a good deal lower than the £94.4m posted last year. That said, this is still more than enough to cover the £27.3m paid out in ordinary dividends last year and the £20m special dividend.

So, DFS’s dividend potential is still impressive as high cash generation is enough to cover shareholder payouts and reduce leverage. The company also has decent growth prospects in the coming years as it rolls out new stores in the UK, Netherlands and Spain alongside double-digit growth in traffic and sales from its online store.

While I’m not confident that I want to be investing in a retailer so exposed to economic headwinds, especially one that’s already warned on profits once, DFS does appear to be a fairly cheap income option trading as it is at around 10 times forward earnings.  

Headwinds are mounting

Another stock trading at low, low prices and offering high, high dividends is womenswear retailer Bonmarché  (LSE: BON). The company’s shares trade at 7.3 times forward earnings and come with an annual dividend yield of just over 8% at today’s stock price.

Of course, shares don’t come this cheap unless the company is facing big problems. And Bonmarché is indeed in a spot of trouble as pre-tax profits for the year to April plummeted from £10.6m to £6.3m year-on-year.

This poor performance came against a backdrop of struggles for many traditional clothing retailers but was compounded by ranges that failed to resonate with today’s trends as well as outdated store layouts and tepid growth from online sales. This means investors will need to closely follow management’s plan to establish new stores at the same time as it modernises its estate, ranges and shopping experience.

An added wrinkle is that as the company ramps up spending on capital expenditure, its hefty dividend payouts are beginning to look vulnerable. Last year operations generated £9.5m in cash, which was enough to cover the £3.4m paid in dividends. However, add on tax payments and the £11m in capex and net cashflow was a negative £6.1m.

With net cash at year-end of £5.5m this isn’t yet a disaster waiting to happen, but the company will be hard pressed to maintain payouts and expansion plans if it posts another poor year of results. That’s enough to stop me from buying Bonmarché shares today.

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Ian Pierce 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.

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 considered, so you should consider taking independent financial advice.

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