The recent market wobble has only increased the number of stocks sporting juicy dividend yields of 6% or higher. BP (LSE: BP), for example, with a dividend of $0.40 (28.8p at current exchange rates), now carries a running yield of 6.1% at a share price of 475p.
I’ll come to the investment case for the FTSE 100 oil giant shortly, but first I want to look at a company that’s just released a stunning set of numbers, including a 91% increase in dividends on the prior year, taking its running yield to a whopping 10.1%.
Plus500 (LSE: PLUS), whose online trading platform allows retail customers to trade Contracts for Difference, posted a 33% rise in annual revenue to $437m for 2017. New customers increased 136% (with interest in cryptocurrencies providing significant momentum for new sign-ups) and active customers increased 103%.
Meanwhile, the cost of acquiring new customers fell 60% to $475 from $1,195. This helped the group’s operating margin for the year increase to 59% from 46% and fed down to a 70% increase in net profit to $200m from $117m.
The shares were as much as 12.2% higher in early trading but have fallen back to around 1,200p (up 1.7%) as I’m writing. With a market capitalisation of £1.4bn, this Israel-based company is among the biggest on London’s AIM market. And yet the stock still looks remarkably cheap on most valuation measures.
The price-to-earnings (P/E) ratio is in the bargain basement at 9.5, based on the latest earnings per share (EPS) of $1.75 (126p at current exchange rates). And then there’s the mammoth running yield on dividends totalling $1.6867 (121.35p). Even excluding the year’s special dividend of $0.6350 (45.68p), the yield is 6.3%.
The company is exposed to regulatory risk but has a track record of overcoming obstacles put in its way by regulators and appears confident of continuing to do so. In which case, investors should continue to be very well rewarded.
However, I’ve never been able to figure out quite how Plus500 manages to be so much more profitable than its peers. And on the basis of not investing in businesses I don’t understand, personally I continue to see this stock as one to avoid.
Having traded below 330p in the depths of the oil price slump two years ago, BP’s shares had recovered to as high as 536p last month. However, they’re now more than 10% below that level, with the price of oil and equity markets both having slipped in recent weeks.
In its annual results earlier this month, the company reported EPS of $0.3131 (22.5p) — which didn’t cover the $0.40 dividend — and despite the recent fall in the shares, the P/E today is still relatively high at 21.1.
Morgan Stanley commented in a recent note on big oil: “Dividend hikes from Total and Statoil mark an important inflection point, and are reflective of the progress that insiders are seeing.” However, BP is more constrained on distributions and its dividend is expected to be maintained but not increased over the next couple of years.
The 6.1% yield may still be attractive for income seekers but, on balance, in view of the constrained payout and relatively high P/E, I’d rate the stock a ‘hold’ rather than a ‘buy’ at this time.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. 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.