This 6%+ dividend yield has slumped 25% today! Is it a now a top ‘dip buy’ for your ISA?

Should you buy this giant yielder following today’s mighty fall? Royston Wild gives the lowdown.

| 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.

In tough economic conditions like these, not even the niche retailers can avoid the washout being felt across the retailer sector.

N Brown Group (LSE: BWNG), a specialist in the plus-size and older age group clothing segments, owns Jacamo and Simply Be and is a perfect example of this. The small-cap put out a string of disappointing updates in 2019, the latest of which in October saw reporting a 5.4% revenues slip in the six months to September.

I was quite surprised to see an 80% share price explosion over the course of 2019 and was fearful that a buying bubble was being created. My concerns came to pass on Thursday following a shocking update that sent the retailer’s share price plummeting 25%. And I worry that this could be the start of a long-term downtrend.

A world of pain

N Brown’s share price has come crashing down after its decision to slash this year’s profit guidance and warn of prolonged problems for the bottom line too.

Pre-tax profit of between £70m and £72m for the fiscal year to March 2020 is now expected. This is short of consensus estimates of between £78m and £84.1m, caused by “lower financial services revenue and a highly promotional market,” apparently, as well as a lower-than-expected benefit from its IFRS9 non-cash provision estimate.  

This would represent a marked slump from the adjusted pre-tax profit of £83.6m in fiscal 2019, and perhaps shouldn’t come as a surprise given the sustained pressure on the top line. N Brown saw product sales drop 4% in the 18 weeks to January 4, it said, while revenues from its credit services division dropped 4.6% year on year, a reflection of reduced product revenues and recent changes to its lending criteria.

But the bad news does not end here. N Brown advised that due to a “reduced scope for bad debt provision improvements, combined with industry-wide regulatory changes,” that adjusted pre-tax profit for fiscal 2021 would likely come in at similar levels to the current year.

Worse to come?

N Brown has thrown the kitchen sink at changing from a store and mail-order retailer into an online leviathan, and the firm now generates more than four-fifths of product revenue from the internet. But in an environment of dire consumer confidence and intense competition in the clothing market, these efforts have counted for little.

The size of the downgrade that N Brown made to its margin estimates today illustrates the mountain that it has to climb just to stay alive. Product gross margin is now anticipated to fall between 125 basis points and 175 basis points this year versus the fall of between 50 points and 150 points it had previously tipped. And it’s likely that it will remain locked in a programme of extreme price-slashing for the foreseeable future as Brexit uncertainties persist, a problem that could throw those insipid profits forecasts for next year off course too.

So forget about N Brown’s big 6.7% forward dividend yield, I say, as well as its tiny forward P/E ratio of below 5 times. This is a share I won’t be touching with a bargepole.

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

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Would a stock market crash matter?

Christopher Ruane explains why a stock market crash could turn out to be positive, not negative, for a private investor…

Read more »

Investing Articles

Has the Rolls-Royce share price peaked?

After a strong 2023 performance and (so far) in 2024, the Rolls-Royce share price has stuttered in recent days. Christopher…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Turning a £20k ISA into a £13,900 yearly second income? It’s possible!

By investing a £20k ISA now using certain basic principles, our writer thinks he could set up a second income…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With no savings, I’d follow Warren Buffett’s number one rule to build wealth

Can this one piece of Warren Buffett wisdom really help our writer as he aims to build wealth in the…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

A second income of £1k a month from just £10 a day! How would I do that?

Mark David Hartley considers how to build a second income stream starting from just £10 a day. Is £1,000 a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Turn £8,900 into a £24k annual passive income? Here’s how!

Christopher Ruane applies some investing lessons from billionaire Warren Buffett when explaining how he'd aim to earn sizeable passive income…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »