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Why I’d avoid this share with an 8% dividend yield and what I’d buy instead

Struggling electrical and telecommunications products retailer Dixons Carphone (LSE: DC) released its half-year results today and the share price dropped around 9% in early trading on the stock market.

Chief executive Alex Baldock admitted in the report that “there are headwinds and uncertainty facing any business serving the UK consumer.” And I reckon the company is among the most cyclical of all retailers because it’s easy for customers to forego spending on electrical products when economic times are tough.

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Company-specific problems

Mr Baldock pointed out that not all of the firm’s problems have been due to sector-wide factors when he said that “we’ve had our own challenges.” He also advised that the firm’s plan for recovery “will take time.” However, he’s optimistic and added that “with this plan, we can now see the way to unleashing the true potential of this business.”

I’m sceptical, though, just as the general consensus in the stock market seems to be, judging by this morning’s share price action. I don’t think any cyclical firm can enjoy much success when it comes to fighting the natural cyclical effects of the wider economic landscape. Especially a firm with a low-margin business such as this one.

I reckon if Dixons Carphone rises again to achieve solid growth and share-price appreciation it will be more to do with customer behaviour induced by the macro-picture than anything much that Dixons Carphone does internally.  But Baldcock said: “We believe in our plan, [we] are under way making early progress and determined to make it a lasting success.” 

Strangely, this makes me feel less confident in the prospects of the firm. I think it’s the words ‘believe’ and ‘determined’, which suggest a lot of belief and determination will be necessary to stand any chance whatsoever of succeeding in the face of the odds stacked against the firm. I’d have preferred to see words such as ‘confident’ and ‘certain’ – welcome to the world of attempting to get ahead in the stock market by analysing director-speak!

Poor figures

Today’s figures are poor. Like-for-like revenue grew 2% compared to the equivalent period last year, headline profit before tax plunged 32%, free cash flow dropped by 33% and net debt rose 33% to £274m. The directors slashed almost 36% from the interim dividend. The dividend payment has historically been covered just under twice by adjusted earnings and today the directors declared that future dividends would be covered three times by earnings, suggesting a potential rebasing of the dividend downwards.

The firm’s optimistic words are all about the future and are in stark contrast with the financial figures the firm has posted today. Looking forward, the turnaround plan hinges on achieving growth in online sales and in sales of credit to customers. The staff will all be given “at least £1,000 of shares” each in an effort to incentivise them. But that could end up being a lot of shares if the share price keeps falling.

If you believe in the turnaround potential of Dixons Carphone, now is probably a good time to consider the company as an investment. But to me, this is one of those situations where I’d rather back the potential of the stock market itself by investing in a low-cost tracker fund such as one that follows the FTSE 100.

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Kevin Godbold 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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