The Motley Fool

Why I’d avoid the turnaround proposition at Connect Group and what I’d buy instead

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.

Since I last looked at distributor Connect Group  (LSE: CNCT) back in early 2017, those holding the stock have endured a tough time. Back then, the dividend yield was in excess of 6%, and City analysts watching the firm had rated the share a ‘strong buy’. But I was sceptical, and said: I worry that such a high dividend payment may be unsustainable, or perhaps it’s a sign of trouble ahead for the underlying business.”

Yet, Connect had raised its dividend by around 32% over the previous five years and had a record of rising cash flow that lent decent support to earnings. So what could possibly go wrong? Apart from its high debt, one problem I saw back then was the firm’s “high level of cyclicality“ in its operations, and I thought it deserved its low rating.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Things unravelled fast

I concluded by saying that I’d keep “a close eye” on the firm for signs of deterioration in trading if the shares were in my portfolio. Luckily for me, the shares were not in my portfolio, because things unravelled fast for the company. The share price is now around 80% lower than it was back then and at first glance, the immediate damage has been caused by a more than 40% plunge in earnings and a slashing of the dividend, which now stands around one-third of its previous level.

The company did dispose of its Education and Care Division during the summer of 2017, which accounted for around 12% of annual operating profit. The transaction raised around £56m, which the firm used to pay off some of its debt. However since then, trading became very difficult for the remaining operations and profits fell off a cliff. I think it was probably right to be wary of the cyclicality in the enterprise all along. The firm’s activities as a distributor in News and Media, Parcel Freight and Books all strike me as lacking any pricing power, or economic niche, to distinguish them from competitors.

Let’s pick up the story with today’s full-year results statement. Compared to the previous year, adjusted revenue slipped 3.8%, and adjusted earnings per share plunged by 40%. That’s grim, considering adjusted figures are aimed at showing the true performance of the business. The directors slashed the dividend by just over 68%.

Now it’s a potential turnaround

Chairman Gary Kennedy was blunt in the report and said: “A year of significant challenge exposed weaknesses in our strategy and its execution, with a consequent impact on results.” But he’s optimistic that the new chief executive, Jos Opdeweegh, can turn things around. Opdeweegh started on 1 September, so it’s early days. And if you like the idea of a turnaround proposition, now is a good time to look at the firm, I reckon.

But I’m not interested. At best, Connect Group is a commodity-style operation and will probably always face challenging trading conditions. I’d rather target a company with better quality indicators and a stronger trading niche, or invest in a tracker fund such as one that follows the FTSE 100 index, which would shield me from individual company risk. When shares go wrong, the results can be catastrophic in your portfolio, so it pays to select your investments carefully, and abstain from investing if you have any doubts, such as those I had with Connect almost two years ago.

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

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.