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One Neil Woodford dividend stock I’d avoid and one I’d buy today

For fund manager Neil Woodford, it’s been a tough year. And today’s profit warning from Woodford stock Drax Group (LSE: DRX) won’t have improved matters.

The coal-to-biomass power generation group says that EBITDA earnings will be £10m lower than expected this year, due to “an unplanned outage on the rail unloading facilities”. This outage is restricting supplies of biomass fuel, and means that two generating units will have to be shut down temporarily. Management expects operations to resume in January.

A potential value buy

To put this news in context, Drax generated EBITDA of £121m during the first half of 2017. So a £10m shortfall across the whole year is disappointing, but certainly not a disaster.

The power company’s shares have only fallen by around 5% so far today, suggesting the market shares my view. So are the shares worth buying at current levels?

After today’s drop, Drax shares trade at a 27% discount to their net tangible asset value of 363p per share. They also offer a tempting yield of 4.7%, although this isn’t expected to be covered by earnings.

From a value perspective, these shares seem to have potential. What’s prevented me from investing myself is the group’s weak profitability. Drax is targeting EBITDA of “over £425m” by 2025.

The group hopes to earn this from a blend of biomass supply, power generation and energy retail to homes and businesses. This may be possible, but it requires the Selby-based firm to nearly double its earnings in eight years. I’ve no way of knowing how realistic this is, so I remain undecided about Drax.

A 6.7% yield I’d buy

One of Neil Woodford’s more recent buys is housebuilder Taylor Wimpey (LSE: TW). I can certainly see the attraction of this stock, which has a growing cash pile and offers a 2017 forecast yield of 6.7%.

The main risk seems to be that the housing market should crash at some point, crushing builders’ earnings. Although I do expect a slowdown, my hunch is that this may not happen anytime soon.

While the government continues to subsidise the housing market with the Help to Buy scheme, I suspect prices may remain stable at levels which would otherwise be unsustainable.

Taylor Wimpey’s latest half-year results certainly seem to suggest that the market has remained strong in 2017. During the six months to 30 June, the firm completed 6,580 homes, 9.3% more than during the same period last year. The average selling price rose by 6.3% to £253k, lifting the group’s adjusted operating profit by 24% to £346m.

An unmissable income buy?

The group’s net cash balance rose from £364m to £429m during the first six months of the year. Much of this cash will be returned to shareholders next year in a planned special dividend of £340m.

In total, Taylor Wimpey plans to return £1.3bn (39.7p per share) to shareholders between 2016 and 2018. “Further material capital returns” are planned from 2019 onwards.

Earnings per share are expected to rise by around 8% to 20.9p in 2018. This should provide solid cover for the forecast dividend of 15.1p per share, which gives a yield of 7.3% at current prices. In my view, the shares are probably still worth buying.

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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.