Here’s a FTSE 250 dividend stock that could be set to beat the Saga share price

If you’re tempted by 7% dividends from Saga plc (LON: SAGA), the FTSE 250 (INDEXFTSE: MCX) hides plenty of other income stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Saga (LSE: SAGA), the company that provides travel, insurance, and other services aimed at the over 50s, have had a bad time. The price slumped after a profit warning last December, hit by the collapse of Monarch Airlines and by a difficult market for Saga’s insurance business. There’s been scant sign of any recovery in 2018 — over 12 months, Saga shares are still down close to 35%.

On fundamentals, I can see why Saga might look tempting. Current forecasts suggest a fairly benign 5% dip in EPS this year, which would put the shares on a forward P/E of under 10. And the predicted dividend of 8.9p would provide a yield of 7%. 

As my colleague Rupert Hargreaves points out, it does look as if Saga is successfully getting over its problems. And its future, partly thanks to its two planned new cruise ships, is looking brighter.

On track

In a trading update in June, chief executive Lance Batchelor spoke of “good momentum this year across our travel and insurance businesses, particularly in new motor and home insurance policies, underwriting performance and bookings for our new cruise ship.

But one thing that always leaves me wary is a high level of debt. At 31 January, Saga was sitting on net debt of £432m. That was 1.7 times trading EBITDA, though down from 1.9 times a year previously, that’s still  perhaps uncomfortably high — especially for a company handing out generous dividends. And then there’s a lot of capital expenditure needed for those new ships. I’m not going to predict a dividend cut, but I can’t help thinking it would make sense.  

As for the shares, I see reasonable value, but I also think there are better buys out there.

Even bigger

If you want an even bigger FTSE 250 dividend, how does the 9% forecast from Bovis Homes Group (LSE: BVS) sound? Admittedly that does include a 45p-per-share special dividend to be paid in November, but the ordinary dividend yield is still expected to come in around 5%.

And the special payment, announced with the housebuilder’s first-half results, is just the first over three years, expected to deliver a total of approximately 134p.

Bovis has suffered a couple of bad years, with earnings per share declining quite sharply in 2017. But the firm looks like it’s turning things around with analysts forecasting an impressive EPS gain this year of better than 40%. A further 15% boost on the cards for 2019 would drop the P/E to 10, which looks attractive compared to the market average.

Too high?

That’s actually a bit higher than industry giants like Persimmon and Taylor Wimpey, both on P/E ratios of about eight. And those predicted EPS gains from Bovis are significantly above the sector average. We’re looking partly at a continuing recovery, but long-term we shouldn’t expect double-digit growth to continue.

But I do think the sector is suffering from weak sentiment after its post-crunch recovery. After years of rapid earnings rises, and a lot of growth, investors will have moved on. I reckon that’s left us with a strongly cash-generative sector with great long-term dividend prospects, at knock-down prices.

I think Bovis Homes is good value now. But then I think the same of our other major housebuilders too.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »