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Should you buy these 2 absurdly cheap dividend stocks yielding 5%+?

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Credit collection specialist Arrow Global Group (LSE: ARW) has missed the target lately, its share price plummeting 41% in the past 12 months despite posting some positive results in that time. The £415m company now trades at a bargain valuation and today may be an excellent entry point, but approach with caution.

Taking aim

In May, Arrow reported a 19.6% increase in revenues to £77.1 for the three months to 31 March, due to increases in core collections and asset management income. Yet immediately afterwards its stock was hit by a bearish ‘sell’ note from Berenberg.

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The broker noted that Arrow was founded shortly before the financial crisis, when it could pick up debt on the cheap, but margins have since narrowed. In 2013, it was able to recover £135,000 for every £100,000 of debt it bought, but that has slumped to £122,000.

Strange flight

This morning it published its interim results for the six months to 30 June and again, they look promising. Core collections rose 15.2% and adjusted EBITDA jumped 16.8%, while underlying profit after tax climbed 10% to £28.4m. Assets under management grew 29% to £49.3bn. The response? No visible impact on the share price. 

Investors are anxious about the future with operating margins forecast to fall from 33.2% to 21.2% and City scribblers also pencilling in an 11.4% drop in earnings per share (EPS) growth rates. EPS are still forecast to rise 15% this calendar year and 21% next, just at a slower pace than before.

These worries may be priced-in with the stock trading at a forecast valuation of just 6.9 times earnings. Today the board hiked its interim dividend by 25% and the forecast yield is 5%, with cover of 2.9. Arrow has looked like a tempting buy for some time, but make sure you know what you are aiming at before letting fly.

Wet sales

It’s not easy being an investor in brewery chain Greene King (LSE: GNK) either, which is down 28% over the past 12 months and 44% measured over five years. The pub sector is struggling as wallets are squeezed and people drink cheap booze at home, and although the group boasts a string of other interests, including Hungry Horse, Old English Inns and Wacky Warehouse, people are watching the pennies here as well.

Coincidentally, FTSE 250-listed Greene King has also been felled by Berenberg, which warned last month that it was a “value trap” due to poor underlying trading and profit is “likely to go backwards again”. Worryingly, it noted that the group pays £103m of dividends a year on free cash flow of just £50m-£60m.

Taking the pledge

That puts the forecast 7.1% yield in a different light, while cover of 1.9 has been made to look more favourable by its recent refinancing deal. Chief executive Rooney Anand has nonetheless pledged himself to the dividend, saying it can be funded without selling any pubs.

Summer trade was good thanks to the hot weather and England’s World Cup run, but that is history now. Earnings per share are forecast to grow just 1% a year in 2019 and 2020, giving little margin for error. Still, trading at a forecast 7.8 times earnings, many of these concerns are already in its bargain price.

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harveyj 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.

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