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I think the Purplebricks share price is an investment trap! I’d much rather buy this 6%+ yielder

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Models of houses on top of pound coins
Image source: Getty Images.

The tough outlook for many parts of the global economy means that there’s no shortage of potential investment traps out there. And, in my opinion, Purplebricks Group (LSE: PURP) is one of the biggest.

Generous lending conditions in the UK are preventing interest from first-time property buyers falling off a cliff. On the whole, though, toughening economic conditions is harming activity in the broader housing market, as is the uncertain outlook created by the country’s ongoing Brexit saga. And these are casting a cloud over online estate agency Purplebricks’ profits picture in the near term and beyond.

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These troubles encouraged the business to downgrade its revenue guidance last month to between £165m and £175m for the fiscal year to April, slicing £10m off the upper limit it had previous estimated.

The prospect of worsening trading conditions in the UK are not the only thing to fear, either, as the cost of its international expansion strategy plays havoc with the bottom line. Operating losses more than doubled in the six months to October, to £25.6m from £11.4m earlier, because of swelling marketing and technology costs. Then there’s the huge expansion into North America that’s a very real danger to broker predictions that Purplebricks will finally break into profit in fiscal 2020. 

Safe as houses

If you’re looking for a property-based stock to help you ride out these troubled times then Cairn Homes (LSE: CRN) is a much better option that Purplebricks, in my opinion. The Irish property market is suffering the same homes shortfall prevalent in the UK, and this is helping to drive earnings higher at the Dublin-based business.

Cairn commented last week that “the supply of new homes is less than 50% of annual demand” and that “increasing capacity within the industry remains constrained by the lack of scaled homebuilders.” Some 35,000 new homes are required in the Republic and 20,000 in the company’s geographical sweetspot of Greater Dublin alone, it estimates. And by hiking production, it’s in great shape to ride the country’s supply imbalance.

The average selling price of the builder’s homes soared to €366,000 in 2018, from €315,000 the year before. And with the number of sold units having ballooned to 804 from 418 in 2017, revenues at the business leapt 125% to €337m.

6% dividend yields!

It’s no surprise that City analysts are predicting that Cairn’s profits will bulge 78% in 2019 and 22% in 2020, meaning that it deals on a dirt-cheap forward P/E ratio of 13.7 times. A cause for further celebration is that these bold numbers, and the company’s exceptional cash generation, mean that it’s expected to emerge as a big dividend payer, too. A maiden dividend of 4 euro cents per share is predicted for this year, resulting in a chubby 3.1% yield. And next year, the yield storms to 6.3% thanks to predictions of a doubling in the full-year payout to 8 cents.

Purplebricks offers plenty of long-term potential, sure. But at the moment, its trading troubles at home and arguably overambitious expansion plans make it far too risky. I’d much rather stick with Cairn and its gigantic dividend yields.

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Royston Wild 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.

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