The Motley Fool

Why I’d sell this value share to buy Saga plc’s massive yield

Shares in utility cost management consultancy Utilitywise (LSE: UTW) are showing up on my value screen at the moment and at first glance appear to offer a bargain. Last year the company recorded a net profit of £15.8m, but you could snap up the entire operation today for only £41.6m. 

In reality, the shares aren’t quite as cheap as the historic P/E of 2.6 implies. Accusations that the company’s revenue recognition policy was too aggressive proved prescient. A trading update in July revealed that a change in accounting policy meant revenue would be £4m to £4.5m below previous management expectations.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

It went on to explain that “given the Group’s relatively fixed cost base, substantially all of the shortfall in revenue will impact the profit before tax of the Group.” 

As a result, 2018 profit before tax will reduce roughly 40%. For some investors, this significant profit warning might come as a shock, but the warning signs were there all along for anyone keeping an eye on the balance sheet. 

The company’s accounts receivable, or revenue that has been recorded but not yet received, as of 31 July 2016 was a massive £19.7m. When the receivables figure is greater than an entire year’s worth of profit, I begin to feel uneasy.

On top of this, the company has discontinued the practice of seeking cash advances from the utilities it works with, meaning net debt could balloon by £16.4m to around £26m at year-end, unless my calculations are off. 

Utilitywise looks set to book a profit before tax of £11m if its estimates are accurate, but I’ve lost faith in its commentary and don’t consider it investible at the moment given the sudden change in expectations for both cash flows and profits this year. 

Contrarian dividends

I consider Saga (LSE: SAGA) a more attractive, yet still risky, value investment. The shares trade on a P/E of nine and offer a prospective yield of 7% to investors. Shares in the over-50s insurance and travel company tumbled roughly 30% earlier this month after revealing that underlying profit before tax is expected to grow 1% to 2%, compared to the previously expected 5%. 

The news doesn’t seem all that bad to me given the company’s strong cash flow, so I presume the market is expecting further downgrades in the near future. Perhaps the shares are currently so depressed because the insurance arm, where the business generates the majority of its profits, is performing slugglishly, or perhaps it is due to fears that conditions could deteriorate further after Brexit. 

Regardless, I believe the current valuation offers a significant margin of safety for those willing to take on a little more risk for the chunky payout. Promisingly, it seems that CEO Lance Batchelor agrees with me, having purchased over 70,000 shares since the profit warning. 

If I were to invest in the company, I’d consider a smaller  speculative position to benefit from the gigantic dividend because it is still covered 1.5 times by earnings per share. 

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.