One of the first lessons for any dividend investor to learn is that companies offering the biggest yields tend to be best avoided. While a chunky payout is attractive, a sky-high one suggests it might not be sustainable.
Unfortunately, separating high-yielders from likely dividend-cutters can get a bit tricky in a period of share price volatility like the one we’re currently in.
Nevertheless, one company sticks out from the pack when it comes to the size of its cash returns to shareholders.
The perfect stock?
Right now, CFD provider Plus 500 (LSE: PLUS) is forecast to yield over 13% in the current financial year. When even the best easy access Cash ISA offers interest of just 1.45%, that’s mighty tempting.
But there are other attractions. For one, trading remains strong, at least according to the company. In its last update towards the end of December, Plus stated that it had “continued to perform well” in spite of regulatory changes, so much so that management believes its financial performance for the full year will now be better than that previously predicted by the market.
Then there’s the valuation. Having come under pressure in the second half of last year, Plus’s shares are now 23% lower in price than when they peaked at a little over 2,000p last August, leaving them trading at just 8x forecast earnings for the current financial year. This looks something of a bargain at face value, particularly when it’s considered that the firm also achieves staggeringly high returns on capital employed and great operating margins (even relative to peers IG Index and CMC Markets).
Sound too good to be true? At least some traders seem to think so.
At the time of writing, Plus 500 is the most shorted share on the London Stock Exchange. In other words, a significant minority of people are betting on its share price falling in the future. To give some perspective, this top spot was once occupied by the now-bust outsourcer Carillion.
Short-selling is risky. Since there’s technically no limit to how much money can be lost if a share price rises rather than falls, those betting against Plus must have a pretty good reason for doing so.
Increased regulatory pressure is an ongoing concern, of course, but Plus’s peers aren’t attracting the same level of interest from shorters.
The disparity between the company and its high-quality competitors in terms of returns is perhaps more questionable. Is it really outperforming to such an extent? Or do many simply doubt CEO Asaf Elimelech’s vision of Plus capturing market share and “growing rapidly in new jurisdictions“?
Whatever the reason, this development is a cause for concern, in my view.
Manage your risk
Whether owners of Plus 500 are about to receive a rude awakening is hard to say.
Shorters can get it wrong. Many betting against Ocado got their fingers burnt over the last year or so as its share price rocketed on the announcement of new contracts.
Nevertheless, the huge rise in interest from shorters around the shares would at least compel me to re-evaluate whether my portfolio was suitably diversified if I did hold the stock.
We must remember that investment is as much about managing risk as it is about buying the best companies.
Plus’s full-year results are revealed on 12 February.
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Paul Summers 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.