One slumping FTSE 250 dividend stock I’d buy today and one I’d sell

Roland Head asks if investors should be loading up with these FTSE 250 (INDEXFTSE:MCX) fallers.

| 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.

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.

It looks like we might be heading into a market correction as the FTSE 250 mid-cap index is down by about 7.5% so far in October.

Market corrections can be uncomfortable, but if you own shares in good quality companies it’s often worth thinking about topping up your stock holdings, rather than selling.

Today I want to look at two FTSE 250 stocks that have fallen by far more than the wider index. Are these firms in trouble or could this be a buying opportunity for savvy investors?

A tale of two halves

Shares of WH Smith (LSE: SMWH) were down by 13% at the time of writing this morning after the firm revealed said it would start closing some of its high street stores.

It’s no secret that its travel business has been powering the group’s growth for several years. Newsagents in airport and railway stations in the UK and overseas have delivered rising profits that have offset falling high street profits.

Today’s full-year results show that this shift is continuing. Travel profits rose by 7% to £103m, while high street profits fell 3% to £60m. Adjusted pre-tax profit rose by 4% to £145m, although statutory pre-tax profit — including one-off costs — fell by 4% to £134m.

Lots of cash

The high street division is a drag on profits, but this group still generates a lot of spare cash. Free cash flow fell by 8.6% to £96m last year, but that’s still equivalent to 87p per share.

All of this cash will be returned to shareholders through a 12% dividend increase to 54.1p per share and a new £50m share buyback.

The costs of exiting WH Smith’s high street shops are a potential concern — £9m was spent on this last year and the firm expects to spend a further £5m this year.

But the group’s exceptionally high return on capital employed of 60% suggests to me that the business should continue to generate plenty of cash. With the stock trading on 15 times forward earnings and offering a 3.1% yield, I’d consider buying during this market wobble.

I’m staying away

Online fashion retailer N Brown Group (LSE: BWNG) is down by 20% at the time of writing after reporting a 5% fall in half-year profits and a 50% dividend cut.

I suspect we know now why chief executive Angela Spindler stepped down in September.

Product sales fell by 3.1% to £304.5m during the half-year period. Group sales only eked out a 1% rise because of a 12.7% increase in financial services revenue — fees from customers who buy on credit.

The company also announced £65m of new impairment charges. These include £22.4m of compensation for PPI claims and £22m relating to store closures.

A deep value buy?

Interim CEO Steve Johnson said that full-year expectations are unchanged. But I suspect brokers will cut their profit forecasts after today’s 5% drop in earnings, which is below expectations for broadly flat profits this year.

I estimate that the shares currently trade on about 5 times forecast earnings with a 6.6% dividend yield. This could be a value opportunity, especially given the value of the group’s £677m loan book.

However, I’m not convinced by the quality of this retail business here and fear further problems. I’m going to stay away for now.

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 has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

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

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »