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This forgotten turnaround stock could yield 12%

Today I’m going to take a look at a stock which could be a very rare find indeed — a company with the ability to offer an affordable 12% dividend yield.

The business in question is personal injury-focused legal services group NAHL Group (LSE: NAH). In its half-year results today, the company confirmed that its performance so far this year is in line with expectations.

The group’s dividend policy remains unchanged, which means that the full-year payout should be covered 1.5 times by earnings per share. Based on forecasts for full-year earnings of 24p per share, that gives a total dividend of 16p. Today’s interim dividend of 5.3p supports this forecast, as NAHL’s final dividend is usually twice the size of its interim payout.

At the current share price of 132p, a dividend of 16p gives a yield of 12.1%. So what’s the catch? Why aren’t income investors buying as much stock as possible?

2 possible problems

NAHL is a business in transition. Changes to the regulations regarding personal injury claims have forced the group to reshape its business. It’s too early to say how successful this will be or whether profits will be sustained at historic levels.

The company expects 2017 and 2018 to be transition years. Analysts’ forecasts are for the group’s profits to fall by around 20% in 2018. I’d expect a similar cut to the dividend next year. But this still gives a prospective yield for 2018 of 9.9%.

Buy or sell?

There’s considerable risk here. But the group’s management has generally delivered well in the past, and its finances remains strong.

I’d argue that if NAHL can maintain profits at next year’s forecast level of around £9m, the shares could rise by about 50% from their current level. However, failure to deliver could result in permanent losses for shareholders.

How safe is this 6.6% yield?

Another company with a very high yield is men’s formalwear specialist Moss Bros Group (LSE: MOSB). This business hires and sells suits to customers and has, for several years, offered a generous yield of about 6%.

This dividend has not been covered by earnings since 2014. But the company’s strong net cash position, boosted by advance payments on hired outfits, has meant that this generosity has been affordable.

However, shareholders will know that the value of Moss Bros shares has fallen by more than 15% since May. While this has lifted the yield on the stock, I believe it’ also highlights growing risks to the dividend.

Clouds gathering?

Moss Bros’s trading update for the 15 weeks to 13 May warned of a 0.5% reduction in retail margins due to a midseason sale. This was introduced in response to “a much tougher trading environment”.

The update also revealed a 3.8% fall in hire orders, while like-for-like hire sales on a ‘cash taken’ basis fell by 14.2% during the period. This was due to the firm reducing the deposit it takes from each customer when hire orders are placed.

Pressure on both cash flow and profit margins appears to be growing. And with the stock already trading on 16 times forecast earnings, I think the dividend is the only thing supporting the share price. If the payout falls, I’d expect the shares to plummet. I’m not tempted at current levels.

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Roland Head 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.