One dividend stock I’d sell to buy this unloved 7% yielder

The market hates this 7% dividend yield but I think it’s worth buying.

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Ashmore  (LSE: ASHM) the emerging markets-focused asset manager, said today that thanks to investors’ improving interest in emerging market equities, it saw an 18% growth in assets under management (AUM) for the six months to the end of December. AUM rose to $69.5bn from $58.7bn at the end of June a result of both net inflows ($7.9bn) and positive market performance ($3.2bn).

However, despite this impressive performance, pre-tax profit declined to £99m for the six-month period, down from the year-ago figure of £121.5m due to a fall in seed capital gains and foreign exchange movements.

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Commenting on the performance, CEO Mark Coombs said: “As Ashmore has generated attractive returns for clients over the past year, leading to strong inflows, it has also delivered positive operating leverage for shareholders, with growth in operating revenues and a reduction in adjusted operating costs leading to an increase in the adjusted EBITDA margin from 66% to 67%.” 

Out of Ashmore’s control

Despite Coombs’ optimism, I’m not as positive on the outlook for Ashmore as its CEO. Over the past five years, the company has struggled to win over investors. Even though the firm manages some of the world’s best performing emerging market investment funds, investors have been wary of its offering due to the underperformance of emerging markets in general when compared to developed equities. 

What’s more, the entire active management investment model is under threat around the world as investors wake up to the fact that excessive fees can cripple investment performance. Low-cost passive investment funds are replacing these instruments instead. 

This trend can be seen clearly in Ashmore’s earnings and sales. Over the past five years, revenue has declined by around 5% per annum as net profit has stagnated thanks to cost-cutting efforts. These problems have weighed on both the company’s shares and dividend. While the shares currently support a dividend yield of 4.1%, over the past five years the payout has hardly budged, and City analysts do not expect this to change any time soon. Also, the stock looks relatively expensive trading at a forward P/E of 19.2. 

A better dividend 

Considering the above, I believe that online clothing retailer N Brown (LSE: BWNG) might be a better buy. Unlike Ashmore, shares in N Brown are cheap, trading at a forward P/E of only 8.7 and the stock supports a market-beating dividend yield of 7.1%. That being said, the stock is cheap for a reason. 

At the end of January, the firm announced that its gross margin forecast for the full year would be below expectations as it spends heavily on promotions to drive sales. These promotions will crimp profit margins, but they are already having a positive impact on revenue

For the third quarter, overall sales grew by 3.2%. And for the year, analysts are not expecting a terrible performance from the firm. A net profit of £62m has been pencilled in, which is below 2012’s record figure of £81m, but above 2017’s £44.3m. It looks as if the market is ignoring this fact, and N Brown’s low valuation leaves plenty of scope for a re-rating higher. 

With this being the case, I believe that the company can meet its current dividend obligations, which makes it a highly attractive income and value play for investors.

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Rupert Hargreaves owns no share 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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