Is this a golden opportunity for income investors to top up, or are these high yields a warning that cuts may be in the pipeline?
Shares in London estate agent Foxtons have fallen by 38% since June, as the London property market has slowed. This has left Foxtons shares offering a dividend yield of 6% for the current year.
However, the housing market hasn’t crashed. Nic Budden, Foxtons’ chief executive, said the firm had a £1bn sales pipeline heading into the fourth quarter. That’s more than at the same time last year. Foxtons has other attractions, too.
The firm’s high pressure sales model may not suit everyone, but it does appear to deliver results. Foxtons is continuing to expand its branch network and earnings per share are expected to rise by 3% to 12.2p this year and by 10% to 13.5p in 2016.
Foxtons’ 26% operating margin and low costs means that it generates a lot of free cash flow. Net cash was £20m at the end of June.
I think there’s a good chance Foxtons dividend will be maintained at current levels, unless the property market really crashes.
Another firm which has protected its dividend in the face of tough market conditions is BP. The group said recently that it aims to balance its cash flow for an oil price of $60 per barrel by 2017.
Chief executive Bob Dudley described the dividend as “a strong priority”. The latest broker forecasts suggest that group’s $0.40 per share payout will be maintained next year. This gives BP shares a prospective yield of 6.8%.
Market confidence in BP was also helped by a strong set of third-quarter results in October. The firm’s underlying replacement cost profit of $1.8bn was up by 38% from $1.3bn during the second quarter, beating analysts’ expectations.
BP shares have risen by 17% from their September lows. In my view they remain a strong long-term income buy.
Shares in this UK-based electronic component company are down by 42% in 2015. Two profit warnings in three months have shaken investors’ confidence and the dividend has already been cut.
However, the shares have fallen so far that even after a 40% cut to the interim dividend, Premier stock still offers a forecast yield of 6.8%. The firm still appears to be performing reasonably well, too.
An operating profit margin of 7.6% seems reasonable for a business of this kind, and the firm’s shares trade on just 8.8 times forecast earnings for the current year.
My only real concern is that Premier’s debt levels are a little too high for comfort. The group’s net debt of £237m is 2.3 times its earnings before interest, tax, depreciation and amortisation (EBITDA). That’s relatively high, in my view. Reducing this multiple could mean diverting cash from dividend payments to debt reduction. In my view this is one reason why the firm’s shares appear cheap.
In my view there is no rush to invest. There are certainly safer dividends elsewhere.
Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.