Why I’d sell this dividend stock despite its 12% yield

Royston Wild looks at a giant yielder investors need to give short shrift to today.

| More on:

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.

Safestyle UK (LSE: SFE) may have avoided another sharp sell-off following the release of full-year trading numbers on Thursday, but the damage was already done in late February.

Back then the business, which manufactures and sells doors and windows in the UK, warned in a trading update that it expected profits in 2018 “to be materially below 2017 levels and current market expectations.”

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

It said that a blend of deteriorating consumer confidence and the emergence of an “aggressive” market entrant had damaged operations and that, as a consequence, orders since the turn of 2018 had “disappointed” and fallen shy of expectations.

To the cheer of income investors however, Safestyle said that its robust cash generation and solid balance sheet would see it pay a final dividend of 7.5p per share and so take the full-year reward to 11.25p, in line with the prior year.

The company made good on this vow today and City analysts at least expect the business to pay an identical dividend in 2018, even though earnings are expected to fall 15%. Safestyle subsequently carries a monster yield of 12.3%.

The bubbly predictions do not end here however, and the Square Mile is tipping the double glazing firm to flip back with a 13% profits rebound in 2019. And this leads to speculation that the dividend will improve to 11.4p, pushing the yield to an even mightier 12.5%.

But I’m not so sure that these predictions aren’t looking just a tad giddy.

Dividends on the rack?

Safestyle advised today that while the average unit sales price rose 7.6% in 2017, the number of frames it installed last year slumped 7.9% to 265,716. This pushed revenues 0.5% lower to £158.6m and this, combined with higher costs, drove underlying pre-tax profit to £15.1m, a 26.3% year-on-year slump.

The AIM-quoted business has a mountain to climb to turn around its bottom line. Although it is taking steps to cut the cost base and to improve turnover by modernising its sales teams, the tough conditions that caused profits to tank last year look set to persist for a whole lot longer.

And this puts dividends in danger in my opinion. Dividend coverage through to the close of 2019 ranges at between 1.1 times and 1.3 times, a country mile below the widely-regarded security watermark of 2 times and above. Meanwhile, cash on the books fell to £11m by December from £13.5m a year earlier, and the investments Safestyle is about to make to improve its processes will put even more strain on its balance sheet.

Despite its low forward P/E ratio of 7 times I believe the windows giant carries far too much risk to make it a sensible investment destination. The share  has lost 70% of its value over the past year and it is not difficult to foresee a further collapse, particularly if the dividend is put through the mincer.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. 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

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Here’s a FTSE 250 stock to buy to benefit from the construction boom!

Jabran Khan details a FTSE 250 stock that could be primed to benefit from the infrastructure and construction boom.

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Is the Royal Mail share price a buying opportunity?

With a 6% dividend yield and a price-to-earnings ratio of 3, is the Royal Mail share price in buying territory?…

Read more »

Scene depicting the City of London, home of the FTSE 100
Investing Articles

3 FTSE 100 shares! Should I buy them?

I'm searching for the best FTSE 100 stocks to buy following recent market volatility. Are these blue-chip UK shares too…

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Should I buy one of the cheapest shares on the FTSE 100 index?

This Fool explores one of the cheapest stocks on the FTSE 100 index by share price and decides if he…

Read more »

Asian Indian male white collar worker on wheelchair having video conference with his business partners
Investing Articles

With trading suspended, where could the Eurasia Mining (LON:EUA) share price go next?

This morning, the EUA share price was suspended pending an announcement - so could improving sales send the share price…

Read more »

Hand holding pound notes
Investing Articles

Are the FTSE 100’s top income stocks a bargain?

The FTSE 100 is renowned for its value and dividend stocks. So, are the index's top income stocks worth a…

Read more »

Compass pointing towards 'best price'
Investing Articles

Scottish Mortgage shares have slumped 40%. Time to buy now?

Scottish Mortgage Investment Trust (LON: SMT) shares have rewarded shareholders well in recent years. I'm thinking of buying now they're…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

3 recession stocks I’d buy in a hurry

With the economic outlook getting worse, our writer highlights a trio of recession stocks he would consider buying for his…

Read more »