Why I’d sell Kier Group to buy this 10%-yielding FTSE 100 dividend stock

The smart money should be flowing out of Kier Group plc (LON: KIE) and into this FTSE 100 (INDEXFTSE: UKX) income hero, argues Royston Wild.

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There’s been no shortage of fallers in 2018 in what has proved an increasingly-tough year for stocks. But for Kier Group (LSE: KIE) it’s proven a proper year to try to forget, its share price dropping an eye-watering 63%.

The FTSE 250 business had been extremely resilient despite the plight of rivals like Carillion, but things came crashing down this December when it announced a £264m rights issue to bolster its balance sheet and cut debt.

Kier advised that current trading, as well as its outlook for 2019, remained unchanged. But it warned that credit access may become harder looking ahead as lenders reduce their lending to the construction sector and related industries. It added that a stronger capital base should help the procurement process given that client are becoming increasingly-focused on the financial health of service providers, again not a huge surprise in the wake of the Carillion scandal.

So with the balance sheet built up, is now an attractive point at which to pile into Kier? Absolutely not, in my opinion. It’s cheap, the aforementioned share price drop leaving it dealing on a bargain-basement forward P/E ratio of 4 times. But it’s cheap for a reason.

Chief executive Haydn Mursell launched the so-called Future Proofing Kier strategy in the summer in part to help accelerate the reduction of net debt. This wasn’t a shock. Put simply, it burns through cash like a furnace and consequently it saw net debt spike to £186m as of June from £110m a year earlier.

Reflecting these strains, City analysts are expecting the business to hack the dividend down in the 12 months to June 2019, to 39.8p per share from 69p in fiscal 2018.

Buy this 10%+ yielder instead!

Now the British construction sector has held up stronger than the rest of the economy in a difficult second half of the year. However, the waters are threatening to be choppier next year as the Brexit battle intensifies, and therefore it’s quite possible that Kier will exceed the 12% earnings drop currently forecast by the number crunchers.

In this environment it’s not out of the question that Kier may start screaming for cash again despite the very-recent raising. If you’re seeking a big-yielding construction stock to buy today you’d be better off ignoring Kier and its 9.8% yield and loading up on Barratt Developments (LSE: BDEV) instead, I think.

Of course conditions have also worsened for the FTSE 100 housebuilder as the sluggish economy has struck buyer appetite. But thanks to the UK’s enduring homes shortage, profits are expected to keep rising at the business, unlike at Kier, albeit by a modest 1% in the year to June 2019.

Barratt isn’t likely to hit its shareholders with a cash call any time soon, given the rate at which it creates cash (indeed, net cash rose more than 9% in fiscal 2018 to £791.3m). It’s a safer dividend pick too, the predicted 45p per share dividend for this year giving it a bigger yield than Kier at 10.3%.

Despite its much greater robustness the homebuilder deals on a marginally more expensive prospective P/E ratio of just 6.4 times. At these prices I’d be happy to sell out of Kier to buy some more of Barratt.

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.

Royston Wild owns shares of Barratt Developments. 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.

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