Pendragon (LSE: PDG) has proved itself to be a dream for income chasers for most of the past decade.
Dividends have swelled by almost 300% at the car dealership over the past five years alone. But the pressures of a deteriorating new car market mean that City brokers are expecting this starry run to come to an end.
With a meagre 2% earnings rise being predicted, they’re expecting payouts to remain locked at 1.55p per share in 2018. On the plus side, however, this reading still yields a tremendous inflation-smashing 6%.
And in better news, dividends are expected to spring higher again in 2018, to 1.6p, helped by an anticipated 14% profits improvement. As a result, the yield storms to a terrific 6.2%.
However, I see plenty of scope for earnings — and also dividend projections — to be painfully downgraded in the weeks and months ahead. The ongoing turbulence in the British economy, and the subsequent impact on consumer confidence and spending power, is playing havoc with new car sales right now, as illustrated by latest data from the Society of Motor Manufacturers and Traders (SMMT).
The industry body recently announced that sales of new vehicles plummeted 21% in September to 338,834 units, with volumes also damaged by the introduction of new emissions testing standards. The SMMT added that, in the first nine months of 2018, sales of new cars were down 7.5% year-on-year.
Pendragon may be focussing increasingly on the used car market, but this segment is coming under increasing pressure as well.
The stock might be cheap, the firm dealing on a forward P/E ratio of 7.6 times, but I still consider it one to avoid, given the possibility of significant and sustained difficulties in the car retail market.
Yields surging close to 9%
In my opinion, a far superior stock to buy with bulging dividends is Card Factory (LSE: CARD).
The FTSE 250 greetings cards seller isn’t immune to the pressures felt by the UK high street, of course — like-for-like sales dropped 0.2% in the six month to July. And this means that an 8% earnings decline is forecast by the City for the year to January 2019.
But, unlike Pendragon and other sellers of so-called big ticket items, the revenues turbulence is unlikely to be as pronounce. And with the firm embarking on an ambitious store expansion programme, the bigger profits picture for Card Factory looks pretty rosy indeed, something which gave it the belief to pay another special dividend (of 5p per share) for the half-year period.
For the current full fiscal year, a 14.8p total dividend is forecast, resulting in a jumbo 7.8% yield. And, helped by an anticipated 4% earnings bounceback next year, a 16.5p reward is predicted which, in turn, pushes the yield to 8.7%.
At current prices, Card Factory can be picked up on a forward P/E ratio of 10.9 times. This, along with those yields, makes it a white-hot buy for serious long-term investors, in my opinion.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of Card Factory. The Motley Fool UK has recommended Pendragon. 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.