There are lots of shares on the FTSE 250 with high yields and rock-bottom prices. Unfortunately, each of these two factors is a result of the other — as the price drops, the yield rises.
Of course, everyone likes a high yield especially if it’s at a bargain — but that’s not always a good thing. The price could just keep dropping until the company goes bankrupt. When looking for dirt cheap shares with dividend potential, it’s critical to assess the long-term viability of the company.
Shares in the price-comparison media platform MONY Group (LSE: MONY) are down 23% in the past year. I recently bought some of the shares when the price fell to a two-year low a few months ago. However, it’s been slow to recover so it still looks like a good bargain.
The key driving factors behind my decision remain in place, a 6.5% dividend yield, decent earnings growth potential and future return on equity (ROE) expected to be around 40%.
The current price level of around 180p has proven to be an attractive buying point for investors in both 2014 and 2022. However, past performance isn’t indicative of future results. So I must also evaluate the company’s market position, demand for its services, and managerial performance.
Economic challenges
Previously known as Moneysupermarket.com, the business rebranded as MONY Group last May. It now operates as a specialist in technology-led money-saving platforms, including several price comparison websites.
The company enables consumers to compare prices on a range of products, including energy, car, home and travel insurance, mortgages, credit cards and loans. Its subsidiaries include MoneySuperMarket, TravelSupermarket, IceLolly, Decision Tech, Quidco, and MoneySavingExpert.
Although it’s considered a market leader, it still operates in a highly competitive industry. The rise of multiple other outfits competing for market share is an ongoing risk pressuring the company. Regulatory changes in the UK financial services sector are another concern that could impact MONY’s operations and profitability.
However, the most likely culprit behind its recent losses is inflation. Consumer spending declined significantly through 2022 and 2023 as the economy suffered a downturn. Many companies using price comparison services have suffered losses and, subsequently, so have the sites themselves.
Long-term potential
Despite the risks mentioned above, I see good long-term growth potential in MONY Group.
We’ve already experienced the first interest rate cut this year and more are expected, with the aim to help reduce inflation. The benefits of a revitalised economy and increased consumer spending would be a boon for the price comparison industry.
If so, MONY’s in good stead to enjoy renewed growth. The share price is currently trading at only 13 times earnings, well below the UK market average.
With earnings forecast to grow 8.6% a year, that figure could come down even further. It’s already 51% below fair value, based on anticipated cash flows, and is forecast to rise an average of 42% in the coming 12 months.
It appears to be a well-established business operating in a high-growth industry and trading below value due to external factors.
I’m as optimistic as ever about its long-term potential and believe it’s worth considering as part of an income-focused portfolio.
