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Big 8% dividend makes the Saga share price look tempting to me

These cold winter months are when people’s thoughts turn to sunshine and where next year’s holidays might be. At least, they usually are, but economic uncertainty and the catastrophic way Brexit is turning out are making a lot of us think again.

And with the pound fetching so few euros or dollars right now, many will be rejecting an overseas holiday completely and deciding to hunker down on these shores. And that really isn’t helping the fortunes of holiday companies at all — but it could mean bargains for investors.

Big dividend

Our worsening outlook has led to a 28% slump in the Saga (LSE: SAGA) share price since a 2018 peak in October, and that’s on top of a big slide around this time last year that’s resulted in a two-year fall of 46%.

This, I reckon, illustrates the growing divide between short-term and long-term investors. When individual sectors are facing downward pressure, those with a short-term outlook (often, ironically, the big institutions who should know better) will sell out just to be on the safe side. But that can provide rich pickings for long-term investors looking for the best in the sector, and Saga looks like one to me.

At the interim stage, debt did look a bit high, and debt can be a killer during poor times. At £430m, net debt stood at 1.77 times trading EBITDA. But that was down a little, which the firm put down to its “highly cash generative model,” which it sees as strong enough to maintain its dividend.

And that dividend is what attracts me most, with forecast yields exceeding 8% at the moment. There’s a fall in earnings of 4% forecast for the full year, but the dividend would be covered around 1.5 times. And as long as debt remains stable, I think the dividend will be safe.

Saga also caters to a relatively wealthy market segment in the over-50s, and I’m seeing a solid underlying business which I think should be able to see out a couple of tougher years comfortably.

Another bargain?

Shares in Thomas Cook Group (LSE: TCG) have crashed even further, dropping more than 75% so far in 2018, so is that an even better bargain?

Thomas Cook’s problems seem to be more direct, with a couple of profit warnings from the company itself leading to a reported loss for the year ended September and the suspension of the dividend for the year.

Although there’s a return to a reasonable profit forecast for 2019, analysts are only expecting a 0.6% dividend yield. And if this were only a one-year earnings blip from an otherwise healthy company, I’d want to see enough cash for it to at least keep some level of dividend going.

At 30 September, Thomas Cook’s debt had soared to £389m (from £40m a year previously). The firm says “we are confident that we will make good progress reducing net debt over the next few years,” but I see one disadvantage for Thomas Cook that Saga doesn’t suffer.

It caters to a more competitive part of the market, targeting young people and families for whom price is very important.

A forward P/E of only around 3.5 could signal an oversold bargain — or a company that’s in serious underlying trouble. I’d go for Saga.

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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.