This month I’m continuing my hunt for the best high-yield dividend stocks in the UK’s mid-cap FTSE 250 index.
Today, I’m looking at three stocks that have all been big holdings in the past for troubled fund manager Neil Woodford. Mr Woodford has sold some of his shares to raise cash. But I believe these firms look attractive at current levels.
A retail essential?
Payment processing firm PayPoint (LSE: PAY) is trying to make the leap from handling cash bill payments to providing a comprehensive range of services for convenience retailers.
The company says that 13,000 of its 28,000 sites are now using the firm’s flagship PayPoint One electronic point of sale system, which provides a wide range of business services.
However, investors received a sharp reminder about the importance of this strategy in June, when PayPoint said its contract to handle British Gas bill payments and prepayment services will not be renewed.
This is expected to result in a £3.5m loss of revenue next year, but management says that underlying pre-tax profit is still expected to rise. I think the bigger question is whether the firm will have to cut its fees to avoid further contract losses.
Despite this concern, I continue to rate this profitable and cash-generative business as a buy. Its national network means that 99% of the UK population is within a mile of a PayPoint terminal.
Trading on 14 times forecast earnings and with an 8% dividend yield, I remain happy to hold and may buy more. Mr Woodford remains a major shareholder too, with just under 11% of PayPoint stock.
This 7% yielder could start climbing
Another of Neil Woodford’s long-term holdings is subprime lender Provident Financial (LSE: PFG).
Shares in this doorstep and online lender crashed in 2017, when previous management attempted a botched restructuring. The firm lost customers and missed many payment collections in the chaos that followed. A number of regulatory issues have also caused problems.
However, the company says that all of these issues have largely been resolved and that trading is improving. All four of the group’s main divisions reported lending growth during the first quarter.
Mr Woodford has cut his stake from 23.44% to 17.98%. But I suspect that he is a reluctant seller. My view is that the firm’s turnaround is likely to come good over the next year.
With the shares trading on just 8 times 2019 forecast earnings and offering a yield of 7%, I can see plenty of upside if Provident delivers on forecasts for 23% earnings growth in 2020.
My final pick is defence-focused engineering contractor Babcock International (LSE: BAB). The shares have fallen by more than 40% over the last year as the firm has weathered suggestions of contract problems and financial difficulties.
So far, none of these have proved to be true. Babcock’s 2018/19 results showed stable performance and an unchanged £31bn order book. Net debt fell and the group’s cash generation improved.
This type of business is always at risk of a major contract going bad. But Babcock’s specialist engineering skills mean that it enjoys much higher profit margins than most outsourcers.
The shares currently trade on just 6 times forecast earnings and offer a well-covered 6.8% dividend yield. Mr Woodford has reduced his funds’ stake below the 5% disclosure limit and may have sold completely. Personally, I think the shares are too cheap. I rate BAB as a buy.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
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Roland Head owns shares of Centrica and PayPoint. The Motley Fool UK owns shares of PayPoint. 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.