The outlook for Marks and Spencer (LSE: MKS) continues to be relatively uncertain. The company is undergoing a significant change which is seeing it focus to a lesser extent on clothing, and to a greater extent on food. So far, this strategy has had mixed results, with the company’s bottom line being relatively volatile in recent years.
With a difficult outlook due in part to challenges for UK consumers, could an alternative option, a 5% dividend-yielder, be a stronger income opportunity than the retail stock?
Improving performance
The 5% yielder in question is emerging markets asset manager Ashmore (LSE: ASHM). It reported an encouraging third quarter update on Tuesday which showed that its assets under management increased by $7bn (10%) during the period. They were boosted by net inflows of $6.4bn, as well as a positive investment performance of $0.6bn.
There has been continued rising demand for the company’s products, with recent market volatility having little effect on the fundamental drivers of returns in emerging markets. The company is forecast to post a rise in its bottom line of 10% in the next financial year, although investors appear to have fully priced-in its improving performance. The stock trades on a price-to-earnings growth (PEG) ratio of 2.1, which suggests it is fully valued.
With a dividend yield of 5% forecast for next year from a payout that is due to be covered 1.3 times by profit, Ashmore seems to have income appeal. However, its performance could be volatile depending on how emerging markets perform, and this could mean that dividend growth is somewhat erratic over the medium term.
Difficult outlook
In contrast, Marks and Spencer has a relatively low valuation at the present time. It trades on a price-to-earnings (P/E) ratio of 11, which suggests that investors are expecting difficult trading conditions. Since consumer confidence has been weak in recent periods, it would be unsurprising for the company to see its sales growth come under pressure. And when its changing strategy is added to the mix, this could lead to underperformance over the near term versus the wider index.
However, Marks and Spencer continues to have long-term income appeal. Its 7% dividend yield is covered 1.4 times by profit. And with the company’s bottom line forecast to flatline over the next two financial years, it appears to be relatively sustainable at current levels.
Certainly, there could be a high degree of volatility ahead. But with a strong brand, a loyal customer base and a competitive advantage within the food retailing space, the stock could be a better performer than the market is anticipating. Therefore, while relatively risky, it continues to have income appeal. Potential rewards on a total return basis appear to be high, with a wide margin of safety suggesting that now could be the right time to buy it.
