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Why I’d keep buying this FTSE 250 6% yielder and this double-bagger after today’s news

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There was good news this morning for shareholders of bus and train operator Go-Ahead Group (LSE: GOG).

Shares in the firm — which operates strike-hit Southern Rail — rose by as much as 16% in early trading after the company said that its overall results were “ahead of expectations” for the year ended 30 June.

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Revenue was almost unchanged at £3,461.5m, but the group’s underlying operating profit fell by 9.8% to £135.9m. This was caused by a 25% drop in rail profits, which fell to £44.5m as a result of the mid-year expiry of the London Midland franchise. Bus profits edged higher, to £91.4m.

I’ve recently added this stock to my own portfolio, as I was tempted by its 6% dividend yield and modest valuation. So I was keen to see if today’s results confirmed my view that the worst of the firm’s problems are now over.

Dividend changes

Go-Ahead will pay an unchanged dividend of 102.8p for last year. But the company is changing its payout policy from this year onwards. Instead of a progressive policy, where the board aims to deliver a flat or increased payout every year, the group will pay out 50%-75% of earnings each year to shareholders.

The advantage of this approach is that it should be predictable and affordable, even if profits fall. However, a change like this is often a crafty way of announcing a dividend cut. Is that true here?

Analysts’ consensus forecasts are for earnings of 159p per share in 2018/19. If this view holds, then we should expect a dividend of between 80p and 119p this year. I suspect management will target a similar payout to the 2017/18 distribution of 102.8p per share, to avoid a cut.

Are things getting better?

Chief executive David Brown says that he expects “a robust performance” this year, despite pressures on profits from London bus and rail operations. I don’t expect rapid profit growth, but I do think the outlook should gradually improve.

Trading on 10 times 2019 forecast earnings, with an estimated forecast yield of 6%, I continue to see Go-Ahead as a good value buy.

A proven performer

Go-Ahead remains a turnaround stock, with certain risks. If you prefer to invest in companies with a track record of market-beating performance, you may want to consider transport firm Dart Group (LSE: DTG), which operates the Jet 2 holiday business.

Dart shares rose by 5% this morning after the company said that travel bookings were growing “slightly ahead of our 25% summer 2018 seat capacity increase”. What this means is that despite adding a range of new services this year, the firm’s flights are more fully-booked than they were last year.

The company also said that a greater number of customers were choosing more profitable package holiday deals, rather than flight-only tickets.

This could run and run

Analysts upgraded their profit forecasts for Dart after the group’s full-year results were published in July. Management confirmed today that it remains confident of meeting these increased expectations.

These shares have doubled over the last year. But strong earnings growth means that Dart stock still looks affordable to me, on 10 times forecast earnings. My buy rating remains unchanged.

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Roland Head owns shares of Go-Ahead Group. 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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