Watch out! I think this 8% yielder could end up costing you a fortune

Royston Wild examines a big yielder that could leave a gaping hole in your pocket.

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Lookers (LSE: LOOK) has proved nothing short of a nightmare for its shareholders during the past 12 months.

It’s no shock to this Fool at least, though I take no pleasure in saying this. I was tipping the UK’s car retailers as rock-solid sells more than a year ago amid painful slumps in new vehicle demand. The 52% collapse in Lookers’s stock price in that time should come as a warning to any of those dip-buyers emerging more recently who are intent to nip in and grab a bargain.

Sure, the small cap might boast a mind-bendingly low forward P/E ratio of 3.7 times, a reading that’s well inside the accepted bargain terrain of 10 times and below. It might carry a jumbo corresponding dividend yield of 8.1%, too. But I for one won’t be touching it with a bargepole.

Stuck in reverse

It’s not just that new car registrations in the UK continue to implode, either, a trend which is showing signs of accelerating if anything. The latest report from the Society of Motor Traders and Manufacturers (SMMT) showed vehicle sales slump 4.6% in May, dragging the average for the year to date down to reveal a 3.1% fall.

Lookers generates 32% of gross profits from new unit sales, so these worsening statistics should come as huge concern. This, however, is just one half of the problem facing the retail giant as demand for used cars — a segment that creates exactly a quarter of profits for the group — has also remained under pressure of late.

The SMMT’s latest report on pre-owned sales showed a 0.6% drop in the first three months of 2019, following on from the 0.7% decline punched in the final quarter of last year.

The bad news keeps on coming

It moves me not an inch that Lookers put in a solid-enough trading update in late May, in which it declared a 3% sales improvement for its new car division for the three months to March, and an even-better 8% for its pre-owned units, too.

Its core aftersales divisions, responsible for around 40% of gross profits, may be stealing the show too and giving shareholders something to cheer about (sales here rose 11% in the last quarter). To my mind, however,this provides little reason to be optimistic, though, as the bulk of its other operations face a frankly terrifying outlook, one which is in danger of worsening as the threat of an economically damaging ‘no deal’ Brexit grows.

And as if things weren’t bad enough, Lookers also shook the market last week by announcing that the Financial Conduct Authority was investigating its sales processes for the period spanning January 1 2016 to the middle of this month. The retailer said that it “cannot estimate what effect, if any, the outcome of this investigation may have,” as one would expect, meaning that investors should also be wary of a whopping great fine coming its way.

All in all there’s plenty to be fearful about for Lookers, and very few reasons to expect its share price to spring higher again. It’s a share only for the extremely brave or the foolhardy, in my opinion, and I for one will continue to avoid it like the plague. 

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.

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