Today, I want to look at two potential value buys with dividend yields of well over 6%.
The first of these is FTSE 250 pub group Greene King (LSE: GNK). Shares in this firm have fallen by about 35% over the last two years. Tough trading conditions and rising costs have put pressure on profits, which have fallen from £191m in 2015/16 to £163m in 2017/18.
You might be thinking that this isn’t exactly a major disaster. I agree. Although profits have slipped, the group’s business has remained stable. Greene King generated an attractive operating margin of almost 15% during the year to 29 April.
A long hot summer and England’s successful World Cup campaign gave beer sales a welcome boost. Like-for-like sales rose by 2.8% during the 18 weeks to 2 September, ahead of market growth of 1.2%. The firm’s own-branded pubs performed even better, with like-for-like sales up by 5.5%.
Do the numbers add up?
I’ve previously discussed my concerns about the group’s 6.9% dividend yield. But I’m becoming more optimistic about its ability to maintain this payout.
Plans are underway to refinance debt, which should lower borrowing fees. The company also says it’s on track to deliver cost savings of £30m-£35m this year. This should help to offset expected cost inflation of £45m-£50m.
If profits stabilise as expected, I think Greene King could be worth buying at current levels. The shares trade on a forecast P/E of 7.6, with a prospective yield of 6.9%. I think this could be a good opportunity to lock in an attractive income.
High risk, big potential profit
In my view, the worst that’s likely to happen to Greene King shareholders is a dividend cut. But investors in newspaper group Reach (LSE: RCH) face a far more uncertain future.
Formerly known as Trinity Mirror, the group owns titles including the Daily Mirror, Sunday Mirror, the Express and OK! magazine. Although the business is profitable and generates plenty of cash, Reach shares currently trade on a forecast P/E of just 1.8, with a prospective yield of 9.2%.
There are two reasons for this extreme valuation. The first is that print newspaper circulation and advertising revenue continue to collapse. The company issued a trading update today revealing that revenue from printed newspaper sales fell by 4% during the third quarter. Revenue from print advertising also fell 20%.
The group’s second problem is that it has a large pension deficit, which was recently reported to be £297m.
The pension probably wouldn’t be a big problem if this business was growing. But it’s not. Newspaper sales and ad revenue are falling relentlessly. Hopes for rising profits depend on generating £20m of cost savings by combining the Daily Star and Express operations with those of the Mirror.
Worth a punt?
Reach’s digital publishing revenue rose by 7% during the third quarter, while revenue from digital ads was 12% higher.
If chief executive Simon Fox can manage the decline of the print newspaper business and build a profitable digital publishing operation, Reach shares really could be absurdly cheap at current levels.
The problem I have is that most newspapers still seem to be struggling with the shift online. I don’t know whether Reach’s red-top tabloids will be among the eventual winners.
I’m tempted by this special situation, but I’m going to stay on the sidelines for now.