Why I’m steering clear of these two big FTSE 250 dividend yields

These two FTSE 250 (INDEXFTSE: MCX) stocks could be set for big gains, but I think they’re only for the brave.

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The Superdry (LSE: SDRY) saga has been interesting, with the firm’s mere decade as a listed company probably causing as much volatility in investors’ blood pressures as in the share price.

A high-level split came to a head when founder Julian Dunkerton, who had previously walked out, pulled off a coup that saw shareholders vote him back in as chief executive and led to the departure of the previous CEO, CFO and chairman.

The CFO hole has, for now, now been filled by Nick Gresham, which sees him taking on the role in an interim capacity. He has extensive experience at sports retailer Wiggle, Oak Furnitureland and Connect Group.

The market reacted positively to the news, pushing the share price up 11%, though the price is still down 75% since the end of 2017.

Back on top?

Can Dunkerton return the brand to its once-dominating position in its niche? He’s approaching it with gusto, ditching directions he thinks are wrong, like the firm’s move into childrenswear. I don’t know much about young adult fashion, but I’m pretty sure that customer segment doesn’t want to be seen as wearing kids’ brands.

So that could be a good move. But the big question is whether the company can win back its design-conscious customers in sufficient numbers. Establishing a fashion brand isn’t an easy exercise, and re-establishing one that’s been pushed into the back seat could be even harder.

The shares are on prospective P/E multiples of around nine to 10, with forecast dividend yields of 5%, and you might find that a tempting valuation. But I’m still not touching it.

Tough time

While Superdry shares were rising, shares in Babcock International Group (LSE: BAB) were falling, down 11% in early trading Wednesday.

Full-year results showed a 40% fall in statutory operating profit and a 41% drop in earnings per share (EPS). The FTSE 250 defence firm pinned the slump mostly on one-off charges, putting its underlying operating profit up 0.7% with underlying EPS up 1.2%. The dividend was lifted by 1.7% to 30p per share, for a 5.9% yield on Tuesday’s closing price.

Is the big dividend a sign of confidence in the firm’s long-term future? To put that yield in perspective, it’s based on a share price that’s fallen 60% over the past five years, with the shares now on P/E multiples of only around six.

Future

There are fears for future profitability, with a couple of Babcock’s big contracts (its Magnox nuclear reactor decommissioning and its aircraft carrier work) coming to an end. And the is also company ditching assets and resizing downwards. Babcock says “a number of step downs” will reduce full-year revenue by £410m and operating profit by £63m.

Chief executive Archie Bethel said: “As we begin the new financial year we do not expect the wider market environment to be any less challenging than we have experienced this past year.” That has to hurt confidence.

Babcock is going through a rough patch, but are the shares oversold on their current low valuation? We could have an attractive recovery candidate here. But bottom picking can be a dangerous game and I suspect there could be worse to come before things get better.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. 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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