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I’d avoid 9%-yielder Plus500 after a 30% drop and buy this FTSE 100 dividend instead

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The Plus500 (LSE: PLUS) share price fell by more than 30% this morning, after the company warned 2019 profits were likely to be much lower than expected.

My calculations suggest the shares may now offer a 2019 forecast dividend yield of about 8.8%. The company has an impressive track record of paying generous dividends. Is this a buying opportunity for dividend hunters?

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In this article I’ll explain why I see Plus500 as a stock to avoid. I’ll also highlight a FTSE 100 stock yielding 8% which I’ve bought for my own portfolio.

What’s gone wrong?

The company’s main problem is the impact of new European regulations which limit the leverage available to retail traders. These are hitting revenue and profits at the firm.

Management now expects 2019 profits to be “materially below” market forecasts. That usually means at least 10%. Consensus forecasts already suggested that profits would fall in 2019. My sums suggest that earnings may now fall by as much as 40% this year.

Why I’d say no

Today’s profit warning was issued alongside Plus500’s 2018 results. These showed that net profit rose 90% to $379m last year. Cash generated from operations rose by 78% to $495m and the company ended the year with net cash of $315m.

However, dividends only rose 18% to $1.99 per share. There was no special dividend and the payout represented 60% of earnings, compared to 96% in 2017. Management appears to be preserving cash for the year ahead.

A second concern is that the company’s founders have been taking money off the table. In December, they sold £145m of stock, halving their collective holdings from 16% to 8%.

I’m also uncomfortable with what appears to be a serious slump in customer recruitment. Today’s figures suggest that new customer numbers fell from about 15,000 a month before the new regulations were introduced, to around 7,000 per month afterwards.

Alongside this, the average cost of acquiring each new customer rose from $677 during the first half of the year to $1,489 during the final quarter of 2018.

Plus500’s business model has always involved high levels of customer churn. Today’s figures suggest that about 40% of customers were replaced last year. If the firm is finding it harder to recruit new traders, I fear that earnings could plummet.

This stock looks cheap at face value after today’s drop. But for me, the risks are too high.

This stock could light up

One high-yielder I’ve bought for myself is FTSE 100 tobacco giant Imperial Brands (LSE: IMB). Although some investors have ethical objections to this business, its financial credentials remain impressive.

Unlike Plus500, customers tend to be very loyal. Although the company is investing in next-generation vaping products under the blu brand, standard cigarette brands require very little investment. As a result, Imperial generates a lot of surplus cash.

Some of this is being used to reduce the group’s net debt of £11.9bn, which was accumulated through a series of acquisitions. I’m keen for debt to keep falling, but I believe the company’s dividend remains affordable.

Imperial’s 2019 forecast dividend yield of 8% is one of the highest in the FTSE 100. Trading on 9 times forecast earnings, I think this defensive business is too cheap and have been buying the shares.

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Roland Head owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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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