Is now the time to buy these unloved dividend stocks?

Royston Wild wonders whether now is the time to buy into two stocks that look like bargains but may not be.

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A disappointing financial release has seen FirstGroup (LSE: FGP) suffer another calamitous collapse in Wednesday trading. Its share price was last 14% lower, extending the company’s long-running downtrend.

The bus and rail operator has now shed almost a third of its value during the past 12 months as investors have lost faith in its long-running turnaround plan. And it’s not difficult to see FirstGroup extending these losses in the months ahead.

Today, the FTSE 250 firm announced that earnings for the full year are likely to fall short of expectations, thanks to problems at its North American businesses.

For its bus operations specifically, FirstGroup noted that “Greyhound’s long-haul business was affected by intensifying airline competition” in the period dating back to last September. But this wasn’t the only problem as “extremely challenging weather conditions in January” dented the performance of all three of its US divisions.

Dividend growth in danger?

Prior to today’s release, City brokers had been anticipating a wafer-thin 1% earnings improvement in fiscal 2018. But of course this is now likely to fall by the wayside, while the 14% forecast for next year looks in severe jeopardy.

Hopes that FirstGroup will re-emerge as a lucrative dividend stock has piqued the interest of some income investors in recent times. Although today’s release was pretty disappointing, one crumb of comfort for dividend chasers will be management’s guidance: “Notwithstanding the mixed trading picture in the period, we continue to expect substantial cash generation for the year as a whole.”

After four years of paying zero dividends to shareholders, the number crunchers were expecting the transit titan to restart its payout policy with a 1.5p per share reward this year, expected to leap to 2.9p in fiscal 2019. Yields for these years stand at 1.8% and 3.5% respectively.

While FirstGroup may have indeed the strength to resurrect its dividend policy in the current period, and to meet brokers’ current dividend projections, predictions of ripping payout growth may fail to come to fruition should difficult trading conditions persist.

With concerns also over the size of the company’s pension deficit, I reckon share pickers should ignore the colossal yields — as well as FirstGroup’s low forward P/E ratio of 6.6 times — and splash their investment cash elsewhere.

Hit the road

With consumer spending power coming under increasing attack in the UK, I reckon fellow big-yielder Inchcape (LSE: INCH) is also too dangerous to merit interest from share pickers today.

The auto retailer has seen its share price duck 13% since the start of October as a slew of industry rivals have all noted a decline in sales volumes in recent months. This is hardly a surprise as demand for ‘big ticket’ items like cars is always the first thing to fall as economic conditions become more difficult.

Reflecting these challenging conditions, City analysts are expecting earnings to dip fractionally in 2018, a projection I think — like the anticipated 4% rebound next year — could be severely downgraded in the months.

As a result, I would ignore an undemanding prospective P/E ratio of 10.8 times, as well as decent dividend yields of 4% and 4.2% for 2018 and 2019 respectively, and steer clear of the motor mammoth for the time being.

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 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.

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