Two 6%+ yielders that could have a major impact on your investment performance

Roland Head takes a closer look at two controversial turnaround stocks.

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.

Investors were given a fascinating glimpse into a possible future for the UK newspaper industry this morning. Trinity Mirror (LSE: TNI), which owns the Daily and Sunday Mirror, revealed that it’s in talks to acquire Express Newspapers, which owns, yes, you guessed it, the Express.

Trinity had previously been considering purchasing a stake in Express Newspapers. But I believe the prospect of owning the Express outright paints a very different picture for investors.

A special situation buy?

There’s not much doubt that printed newspapers and print advertising are in decline. Trinity Mirror’s revenue is expected to fall from £713m to £626m in 2017, and then to £592m in 2018.

And yet this remains a very profitable business. The shares offer a 6.2% yield that’s covered comfortably by free cash flow. Net debt is pretty insignificant, and although the group’s pension deficit is a concern, I don’t think it’s a deal breaker.

One remarkable point is that the group’s stock trades on a P/E of 3. My reading of this ultra-low rating is that investors are determined to extract as much as from the business as possible (through the high yield) before it goes bust.

Is this too pessimistic?

Combining the Mirror and Express newspapers into one group could generate some attractive cost savings. I suspect that both journalism and printing costs would be cut, while a larger combined readership could attract higher advertising rates.

Although we don’t know much about the profitability of the Express, Trinity boss Simon Fox presumably believes he could make a profit from the newspaper.

I believe there’s a chance that a combined business could generate a lot of cash for shareholders for a period of time. The question is how long that period would be. Could the business adapt to a profitable long-term model?

These are difficult questions, and I don’t know the answers. But I think there’s a chance that buying Trinity Mirror shares today could be a very profitable decision.

How safe is this 6.6% yield?

Satellite internet provider Inmarsat (LSE: ISAT) was one of the pioneers in this industry. Setup in 1979 to provide telephone services for ships at sea, it’s grown into a £3bn company which provides satellite broadband to ships, airlines and many other organisations.

Unfortunately this growth has come at a price. Investing in the latest generation of satellites has been costly, leaving the group with net debt of $2bn. At the same time, market conditions have softened in some sectors.

Analysts have responded by cutting their 2017 earnings forecasts for the firm from $0.57 per share one year ago to $0.43 per share today. This has left the group’s forecast dividend of $0.57 uncovered by earnings, but offering a prospective yield of 6.6%.

A recovery buy?

In my view, Inmarsat is a market-leading business that’s deeply embedded in several key markets. It’s also still a very profitable business, with an operating margin of about 30%.

Earnings are expected to rise by 19% in 2018. I’m confident this business will recover and remain successful. So buying today could be a contrarian opportunity.

However, the group’s $2bn debt burden and uncovered dividend look uncomfortable to me. I don’t think the shares are cheap enough yet to reflect the pressure on the firm’s balance sheet and the risk of a dividend cut.

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.

Roland Head 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

Investing Articles

5 FTSE 100 shares to consider buying for passive income right now

The FTSE 100 is having its best start to the year for ages, and that's pushing the top dividend yields…

Read more »

Investing Articles

One overlooked cheap share to tap into the year’s hottest theme?

This Fool describes the key things to think about when investing in copper stocks and analyses one cheap share to…

Read more »

Investing Articles

A cheap FTSE 100 stock that’s ready for a dividend hike in 2024

This banking giant is one of the FTSE 100's greatest dividend stocks. And at current prices, our writer Royston Wild…

Read more »

Growth Shares

Is the BP share price set to soar after Michael Burry invests in the firm?

Jon Smith takes note of a recent purchase from the famous investor behind The Big Short and explains his view…

Read more »

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

I’d focus on Kingfisher now after the Q1 report leaves the share price unmoved

With the share price near 262p, is the FTSE 100’s Kingfisher a decent investment now for dividends and business recovery?

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

£500 buys me 493 shares in this 7.4% yielding dividend stock!

The renewable energy sector remains out of favour. As a result, there are some high-yielders around, including this dividend stock.

Read more »

Road trip. Father and son travelling together by car
Investing Articles

If I’d put £10k into Tesla stock 2 years ago, here’s what I’d have now

Tesla stock has fallen in the past few years. But the valuation looks temptingly low now, as we approach a…

Read more »

Google office headquarters
Investing Articles

Up 41.5% in a year, here’s why Alphabet is one of my top stocks to buy

Our author thinks Alphabet is one of the best stocks to buy. He says its undervalued, highly profitable and has…

Read more »