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Why I’d sell this 6% yielder to buy this FTSE 100 growth star

Image source: Getty Images.

I’m no fan of much of the retail sector today due to the severe political and economic headwinds that are making consumers keep a tight rein on their purse strings.

Latest retail sales data this week lifted some of the gloom with the Office for National Statistics (ONS) advising that sales snapped back in February, rising 0.8% month-on-month.

However, scratch a little deeper and the latest release still made for grim reading. Firstly, thanks to declines in both December and January, retail sales in the UK still dropped 0.4% in the quarter ending February, illustrating the broad downward trend in shopper activity.

And there was little for sellers of non-food goods like Dixons Carphone (LSE: DC) to celebrate in particular, as both the value and volume of goods sold last month fell 0.3% from January levels. The ONS said this decline was down to consumers choosing instead to “spend on essential items” at the expense of discretionary goods.

Against the wall

And these tough conditions have been illustrated by the sheer number of spooky updates from across  the retail sector.

Just this week, menswear retailer Moss Bros shocked the market with yet another profit warning; DIY specialist Kingfisher cautioned that trading conditions are becoming tougher in Britain; and Carpetright advised it was exploring entering a company voluntary arrangement and was planning to close a raft of stores up and down the country.

The situation is particularly bleak for sellers of ‘big ticket’ items such as electricals, naturally, as underlined by Dixons Carphone’s decision in January to narrow its profits guidance for the year. It said then that it expected to deliver profit before tax within a £365m-£385m range, down from the target of £360m-£400m. And it’s not outside the realms of possibility to expect another cut before the period is through.

Cheap and cheerless

City analysts are expecting the FTSE 250 business to report a painful 26% earnings decline in the 12 months ending April, and although a 3% rebound is forecast for fiscal 2019, I cannot help but fear that this optimism is a little fragile.

With both figures in such severe jeopardy, I would give little regard to Dixons Carphone’s low forward P/E ratio of 7 times and stay away. Heck, I would even be happy to ignore its large 6.4% dividend yield in the current climate.

A sage selection

Any cash you contemplate spending on the gadgets giant would be much better served by splashing out on The Sage Group (LSE: SGE), in my opinion.

The FTSE 100 business has failed to break back following the sharp sell-off in January that reflected signs of a soft start to the year. However, I see this is a prime buying opportunity. The accountancy software provider has long proven itself to be a dependable earnings expander, thanks to the indispensable nature of its services. And its move to subscription-based products should herald the next step on its growth journey.

City brokers are expecting profits rises of 11% and 10% in 2018 and 2019, respectively. I reckon a forward P/E ratio of 19.3 times is an attractive level upon which to grab a slice of Sage.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.