One 7%+ dividend yield I love and one high-yield falling knife I’d avoid

A dividend yield over 7% covered nearly four times by earnings and rock-bottom valuation make this stock a contrarian favourite in my eyes.

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.

Annual results released this morning by Inmarsat (LSE: ISAT) capped off a dreadful year for the satellite firm in which profits shrank by a quarter, it slashed its dividend based on cash flow fears and saw its share price swoon by over 40%.

But with a hearty 5.5% dividend yield still on offer, an underlying business that is still profitable, and solid growth opportunities, should contrarian investors take a chance on Inmarsat?

I would urge caution. On one hand, the group still makes a fairly compelling investment case as its revenue is growing, up 5.4% last year to $1,400m. And its largest segment, maritime solutions, may finally be turning a corner with Q4 sales returning to year-on-year growth. Furthermore, over the medium term its pan-European satellite broadband solutions for aircraft is a potential goldmine if air passengers fork over gobs of cash to stay connected during their flights.

However, there are also plenty of red flags. For one, margins are compressing as management ups investment in the aviation division in anticipation of future growth. Of course, this could work out wonderfully, but competitors have launched a lawsuit against the tender that awarded Inmarsat this contract, it’s far from clear whether future demand will ever meet lofty expectations, and the cash-intensive nature of this division means it needed to cut cash outflows elsewhere to pay for it, which led to the dividend cut.

Then there is the group’s high and rising net debt, which increased to $2,078m at year-end as net cash flows turned negative to the tune of $166m. This net debt is still only 2.8 times EBITDA, but with profits moving backwards and cash outflows increasing, Inmarsat had better hope its big bet on European in-flight WiFi pays off. This may yet turn out to be the case, but with plenty of red flags and a non-bargain valuation of 14 times forward earnings, I’m giving Inmarsat a wide berth for now.

Can management turns these rags into riches? 

A more interesting high-yield option for contrarians may be newspaper publisher Trinity Mirror (LSE: TNI). The group currently offers investors a massive 7% dividend yield that is covered nearly four times by earnings.

Of course, there is the minor problem of print newspaper readership stuck in terminal decline. And Trinity Mirror hasn’t been, and probably never will, be able to solve that one.

That said, management has found a way to keep its papers highly profitable even as revenue careens downwards. And the key is snapping up other newspapers and ruthlessly cutting costs, which boosted operating margins to a respectable 20% last year.

Its most recent deal was the £127m purchase of the owner of the Daily Express. Management expects it can slash operating costs at the newly acquired papers by some £20m a year, which in addition to the £35m in EBITDA they already generate, could make the deal another great one.

These sorts of deals won’t stop revenue falling as advertisers continue to move online, but if management can figure out how to monetise its market-leading 33.4m unique monthly online visitors, it could actually return to growth as newspaper revenue shrinks. There’s still a long way to go, but for investors who believe Trinity Mirror’s high-grade management team can pull off another coup, its shares could be a bargain at under 3 times forward earnings.

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.

Ian Pierce 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

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »