Red alert! Will this unloved 6% yield surge or sink in July?

Royston Wild runs the rule over a hated dividend stock and considers its share price prospects for next month.

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It remains a pretty tough time to be a McColl’s Retail Group (LSE: MCLS) investor. A 67% share price decline in the past 12 months and a shocking rebasing of the dividend which saw the total payouts more than halve in the last fiscal year. Add to that the threat of more trouble to come amid intensifying competition, and a shocking deterioration in the broader retail environment.

Could it be argued though, that now is actually a great time to plough into McColl’s again? Some would see its forward P/E ratio of 8.8 times as low enough to reflect any more trading turbulence that might well come its way. Income hunters may see its jumbo 5.7% corresponding dividend yield as a reason to pile in too.

Reasons to be cheerful

But there’s no sugar coating it. Sales at the convenience store giant have been in the doldrums in recent years because of those aforementioned structural and cyclical problems, not to mention the collapse of supplier Palmer & Harvey two years ago.

Glass-half-full investors would suggest the business may be showing green shoots of recovery — like-for-like sales grew of 1.2% in the first 11 weeks of the fiscal year beginning December 2018, improving from flat growth in the prior quarter. McColl’s seems to be coming through the gloom created by the aforementioned collapse of its rival, while steps to improve key product lines, such as fresh food, also appear to be paying off.

What’s got many in the market quite excited is the steps the grocery play is making to boost its relationship with industry colossus Morrisons. Since the latter became the supply partner in 2017, the tie-up has steadily evolved, with McColl’s becoming exclusive stockist of the FTSE 100 firm’s Safeway-branded products.

And, more recently, McColl’s rebranded 10 of its stores under the Morrisons Daily fascia, a move which analysts at Peel Hunt said could make “a major difference” to the top line. Indeed, the broker suggested the decision to sell Morrisons-labelled products under the company’s branding could be “gold dust” to its smaller rival and prompt an extension of the programme to other stores in its estate.

Fresh financials coming up

Sceptics would argue Peel Hunt may be overestimating the possible impact of the tie-up in the wider scheme of things. It’s true the convenience segment continues to grow ahead of the broader grocery market, but the country’s Big Four operators still expanding their own operations here too. Just this month, Tesco announced plans to introduce upmarket stores stocking its Finest premium ranges.

Allied with the threat posed by the growth of the online and discount segments, McColl’s has a hell of a fight to keep its recent sales recovery rolling, in my opinion.

Now half-year financials are set to be released on July 23, but I’m still content to avoid the business. I’m not just fearful over the competitive pressures on McColl’s long-term profits outlook. I’m also concerned about how the rising pressure on consumer confidence will be reflected in that upcoming release. And for this reason, I think the retailer is in danger of resuming its shocking share price downtrend.

So ignore those big yields and low earnings multiples, I say. Instead, go shopping elsewhere for chubby dividends.

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 recommended McColl's Retail and Tesco. 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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