Watch out! I’d never waste my money on this big-yielding FTSE 100 investment trap

Royston Wild looks at a FTSE 100 (INDEXFTSE: UKX) share that could leave a gaping great hole in your pocket.

| 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.

Participating in the stock market is the best way to make your money work for you. Investing in a cash account may be considered less risky than snapping up shares, but these low-yielding options won’t help most of us to build a large cash pile, or protect us against slipping into pensioner poverty.

That said, there are plenty of shares that look good on paper but which threaten to decimate your savings. Kingfisher (LSE: KGF) is one such company where the risks far, far outweigh the potential rewards on offer.

The DIY specialist launched its ONE Kingfisher restructuring plan three years ago to bolster sales and margins, and give annual profits a boost to the tune of £500m by 2021. It can’t be disputed that the plan is failing though — latest earnings details showed pre-tax profit plummeted by 30.1% to £281m for the February to July fiscal half — and that has raised speculation over whether chief executive Veronique Laury will be forced out.

It’s a trap!

Broker forecasts would suggest that things aren’t as bad as all that. Just a fractional improvement in earnings per share has been estimated for the year ended January 2019, although Kingfisher’s performance is expected to improve markedly in the current fiscal period (a 16% bottom-line rise is currently anticipated).

Glass-half-full investors might be tempted in by this. A forward P/E ratio of 8.9 times provides a margin of safety and bakes in the chances of this positive reading being blown off course, they might argue. And a chubby, inflation-smashing 5.2% dividend yield provides the cherry on top of the cake.

I say that’s wrong, wrong, wrong! There’s a reason why Kingfisher is this cheap and it’s because the broader market has little faith that the home improvement retailer has what it takes to turn things around. A share price fall of 36% in the past year alone illustrates this, and I for one fully expect the Footsie firm to keep on sliding.

Sales slumping

Whilst Kingfisher’s turnaround plan has been a massive disappointment, the significant deterioration in its two key markets of the UK & Ireland and France certainly hasn’t helped. Unfortunately for the B&Q owner, conditions only appear to be getting worse, setting the stage for the possibility of further share price weakness.

Latest quarterlies showed like-for-like sales in France fell 3.4% between August and October, worsening from the 2.4% drop of the first half and driven by a shocking 7.1% revenues fall at its Castorama stores. As if this wasn’t enough, in the UK & Ireland like-for-like sales dropped 0.7% in Q3, worse than the 0.5% reversal in the first half.

Problems across the Channel were the chief driver of group like-for-like sales falling 1.3% in the quarter, and such is the scale of the challenge to turn around its slumping French stores that Kingfisher will exit Russia, Spain and Portugal to double-down on this critical region. Rather worryingly, though, Laury commented that reinvigorating its France region is likely to be “no quick fix.”

A world of hurt awaits for those thinking of snapping up Kingfisher, in my opinion, and it’s a share that should be avoided like the plague. There are plenty of brilliant blue-chip dividend shares that could make you rich, but I’m afraid this embattled retailer isn’t one of them.

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 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.

More on Investing Articles

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 »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »