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Here’s a rising 7% dividend stock I’d buy today, and one I’d avoid

Newspaper and magazine distributor Connect Group (LSE: CNCT), formerly part of the WH Smith businesses, has been struggling with an earnings slowdown for a number of years. Analysts aren’t expecting to see a return to EPS growth until 2020, and even then it would only be in single digits.

Meanwhile, the dividend has been slashed — from 9.8p per share in 2017 to just 3.1p in 2018. In my view, this is another “Yes, it had to happen, but it should have been done sooner” event. Leaving corrective action until things are so bad it’s forced on a company is a corporate habit I hate.

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It gets worse too, with a further halving to a mere 1.5p on the analysts’ cards for this year.

Update

Tuesday’s trading and strategy update looked mixed to me. On the one hand, the company reckons everything is going in line with expectations, and says it’s making good progress with its strategy “based on rebuilding the strengths of its core businesses.”

What concerns me, though, is the apparent weakness of those core businesses. Total revenue has dropped by 4% in the 19 weeks to 12 January, which the firm says is expected and “a consequence of well-established trends in the newspaper and magazine markets.”

Balance sheet progress looks positive, with net debt at 31 August of £83.4m, representing a net debt/EBITDA ratio of 1.8x. And Connect is aiming for a reduction to just 1x by 2021.

With the 1.5p dividend still representing a 3.5% yield on the collapsed share price, I might be tempted to see this as an opportunity — in any other business. But the paper-based publishing sector is a declining one that I want no part of.

Stronger turnaround

Shares in infrastructure firm Kier Group (LSE: KIE) plummeted in December, as contagion in the sector after the Carillion collapse looked like spreading. With creditors getting increasingly twitchy, Kier announced its intention of launching a new rights issue to shore up its balance sheet.

The dividend will suffer, with analysts expecting the payout for the year to June 2019 to be pared to the bone. Not before time, clearly. I can never understand why companies carrying huge debt can justify paying big dividends — it’s effectively borrowing money to give to shareholders.

Anyway, after the share price collapse (it lost 64% in the 12 months to 10 December), even the greatly reduced dividend would yield 3.5% and would be five times covered by forecast earnings. And the 2.5-times covered 37.5p suggested for 2020 would boost that to 7.3%.

Desirable dividend?

Before I’d buy, I’d want to be convinced that the feared liquidity crisis has been averted, the mooted dividends look sustainable, and Kier’s performance is solid.

The recent uptick in the share price (up 42% since 10 December, though still down 45% over 12 months) suggests confidence is returning, and a trading update delivered on Tuesday backed that up.

The company says it’s “on track to meet its FY19 expectations,” though, with the firm’s year weighted towards the second half, we still have some time to wait to see how that goes. 

Average month-end net debt is down to around £370m (from £410m) after the rights issue, and the company expects to report net cash by June. I’m cautiously optimistic.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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.