The Motley Fool

A FTSE 100 dividend stock I wouldn’t touch with a bargepole

You don’t have to look far to find brilliantly-priced dividend stars on the FTSE 100.

Arguably the housebuilders are the hottest ticket in town on account of their mega-low earnings multiples and monster dividend yields. But if you’re not fancying the builders, you can look a little further at some of the Footsie’s airlines, insurers, and pharmaceutical manufacturers, for example.

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...

Largely speaking, the companies in these segments are reaping the fruits of stable market conditions and successful growth strategies. You only have to look at the positive trading updates recently put out by the likes of Persimmon, IAG, Prudential and GlaxoSmithKline for evidence of this.

However, one sector which I am most cautious about investing in at the present time is the FTSE 100 retail segment. Take index stalwart Marks & Spencer (LSE: MKS), for one. Sure, it may carry a forward P/E ratio of just 11.5 times, as well as a corresponding dividend yield of 6.1%, but in my opinion, the risks to future profitability are still not baked into the share price.

Market conditions worsening

You see, right now City analysts are forecasting that profits will fall 5% in the year to March 2019, a third successive annual drop if realised. However, I believe that these forecasts are in danger of painful downgrades as the fiscal year progresses.

Latest trading details released in May showed the sales slide worsen considerably during the second half of the last fiscal year, as demand for the retailer’s expensive foods followed that for its frumpy fashion in moving south.

Marks and Sparks announced steps to improve its appeal to “family-age customers” by improving its designs, cutting the number of ranges and creating more attractive price points. However, this isn’t the first time we’ve heard such things from the London business. And what’s more, M&S couldn’t be embarking on transformative measures at a worse time given the current state of the high street.

The British Retail Consortium advised this week that like-for-like retail sales growth in the UK more than halved in July, to 0.5%. Conditions are unlikely to get any easier either as the diving pound adds fresh inflationary pressures, and the ongoing Brexit saga causes consumers to save rather than splash out.

Forget that 6% yield

Current earnings forecasts aren’t the only projections that are looking a bit heady at Marks & Spencer either. Some brokers have been upwardly amending their dividend forecasts despite the company’s worsening revenues outlook, and they are now expecting M&S — which has kept the payout locked at 18.7p per share for the past few periods — to lift it to 18.8p in fiscal 2019.

I’d consider this anticipated dividend to be the stuff of pure fantasy, though. Not only is the estimated payout covered just 1.4 times by currently estimated earnings, but debt at Marks & Spencer, although falling, still stands at a colossal £1.8bn.

As I say, there are plenty of brilliant income shares that Footsie investors can get hold of today. M&S isn’t one of them.

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’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Prudential. 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

The renowned 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 enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.