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Read this before buying into Saga’s 7.2% dividend yield

After falling by nearly 50% over the past 12 months, today shares in Saga (LSE: SAGA) look attractive. Indeed, the stock is trading at a forward P/E of 9.5 and currently supports a dividend yield of around 7.2%. As the payout is covered just under 1.5 times by earnings per share (EPS), in my view this distribution looks safe for the time being. 

Meanwhile, City analysts are expecting a slight decline in EPS this year (from 13.4p to 13p) but a recovery in fiscal 2020, which should take earnings back to where they were last year. 

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Rebuilding the business

Saga has suffered recently due to the restructuring of its insurance operations and the failure of Monarch, the largest UK airline to go bust, which affected nearly one million of its passengers and sparked a restructuring at its travel division.

However, now these issues are behind the enterprise, Saga’s outlook is improving. Key to the company’s future growth are two new-build boutique cruise ships. Management believes that investing in these new ships will turbocharge the group’s growth and cash generation. I am inclined to believe in this projection as, by operating cruises itself, Saga should be able to achieve higher profit margins.

Still, what concerns me is the growing level of competition in the cruise, travel and general over-50s market. The world’s population is ageing and more and more products to help retirees are hitting the market every month. Saga’s brand has helped the company stay ahead of competitors for many decades, but with competition growing, I reckon it could only be a matter of time before customers start to go elsewhere. For this reason, I’m wary of recommending the shares. 

A better buy? 

Because of the growing opportunity in over-50s travel, competition is increasing, which could ultimately squeeze Saga’s market position. One market where competitors are not rushing to grab market share is the waste management business.

Biffa (LSE: BIFF) is one of the most significant players in the UK waste management business. Best known for its large bins usually parked around the side of convenience stores or at festival campsites, Biffa is eponymous with waste management. The company’s size, scale and reputation give it a substantial competitive advantage over peers.

Management is using the group’s robust balance sheet to consolidate the waste management sector. Its industrial and commercial waste division has completed four significant acquisitions to date, spending a total of £20m to acquire £22m of expected annual revenues. More deals will likely follow as “the acquisition pipeline remains robust,” according to management.

Following these deals, City analysts are expecting EPS growth of 33% for the current financial year, which translates into a forward P/E of 13.1. A dividend yield of 2.7% is also on offer. The payout is covered 2.8 times by earnings per share, so there’s plenty of room for dividend growth. However, for the time being, it looks as if the company is going to concentrate on reinvesting capital into acquisitions, which in my view should generate better returns for investors over the long run

So overall, as Biffa continues to consolidate and dominate the UK waste market, I believe it could be a better investment than struggling Saga.

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Rupert Hargreaves owns no share 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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