Why I’ve bought this Neil Woodford 9% dividend stock

Roland Head gives his view on two high-yield stocks held by Woodford Investment Management.

| 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.

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.

A dividend yield of 9% is often unsustainable. But not always. Sometimes, high payouts like this are a sign that the market has mis-priced a stock.

Fund manager Neil Woodford has made no secret of his view that a number of high-yield UK stocks are undervalued at the moment. Today, I’m going to look at two such shares, including one I own myself.

A turnaround success

Woodford has bet heavily on UK housebuilders in his income portfolios. According to my colleague Ed Sheldon, he’s recently sold his funds’ shares in Lloyds Banking Group to buy even more housebuilding shares.

I’m a little more cautious about the outlook for the housing market, but one builder I do own is Bovis Homes Group (LSE: BVS).

The firm ran into problems in 2016 when it failed to hit build targets and experienced a surge of complaints about the poor quality of completed properties. Experienced chief executive Greg Fitzgerald was brought in to sort out these problems and get profits back on track.

The group’s latest results suggest that Fitzgerald is succeeding. Customer satisfaction scores and profit margins both improved during the six months to 30 June. Bovis also achieved an average net cash position of £6m during the period, compared to average net debt of £96m a year earlier.

More to come

Bovis recently lifted its interim dividend by 27% to 19p and declared a special dividend of 45p per share. Analysts are forecasting a total payout for this year of 102p per share, giving the stock a forecast yield of 9%.

I think the shares are still too cheap. The group’s half-year operating margin of 14.6% remains well below the 17-20% being achieved by most peers.

I think more gains are likely and remain a buyer at current levels.

A gift at this price?

Another high-yield choice favoured by Woodford is discount retailer Card Factory (LSE: CARD).

He has a 7% stake in a firm that differs from most rivals, by designing and printing its own cards. This approach supports a surprisingly high operating margin of 18.7%, and results in very strong cash generation.

Unfortunately, the firm isn’t immune from the pressures being experienced by other retailers. Figures published today show that although sales rose by 3.2% to £185.3m during the six months to 31 July, this was only achieved by opening new stores.

Like-for-like sales fell by 0.2%, and the group’s underlying operating profit fell 11.6% to £24.5m.

Buy, sell or hold?

Card Factory’s interim dividend was left unchanged at 2.9p per share today. But the company did declare a special dividend of 5p per share in order to return £17.1m of surplus capital to shareholders.

My concern is that the firm is paying out dividends that are not covered by free cash flow. In the 2017 and 2018 financial years, the group paid out £164m in dividends. During the same period, my sums show free cash flow of £125.8m.

Although the group’s £160m net debt is unlikely to become problematic, I’d prefer to see a low-growth business like this restrict its dividends to genuine surplus cash. This would minimise the risk of problems if trading conditions continue to worsen.

I accept that I may be too cautious. The stock certainly looks tempting, with a P/E of 10 and a prospective yield of 7.3%. I’m not buying, but I’d understand if you did.

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.

Roland Head owns shares of Bovis Homes Group. The Motley Fool UK owns shares of Card Factory. The Motley Fool UK has recommended Lloyds Banking Group. 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

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »