The Motley Fool

Watch out! I’d never waste my money on this big-yielding FTSE 100 investment trap

Participating in the stock market is the best way to make your money work for you. Investing in a cash account may be considered less risky than snapping up shares, but these low-yielding options won’t help most of us to build a large cash pile, or protect us against slipping into pensioner poverty.

That said, there are plenty of shares that look good on paper but which threaten to decimate your savings. Kingfisher (LSE: KGF) is one such company where the risks far, far outweigh the potential rewards on offer.

The DIY specialist launched its ONE Kingfisher restructuring plan three years ago to bolster sales and margins, and give annual profits a boost to the tune of £500m by 2021. It can’t be disputed that the plan is failing though — latest earnings details showed pre-tax profit plummeted by 30.1% to £281m for the February to July fiscal half — and that has raised speculation over whether chief executive Veronique Laury will be forced out.

It’s a trap!

Broker forecasts would suggest that things aren’t as bad as all that. Just a fractional improvement in earnings per share has been estimated for the year ended January 2019, although Kingfisher’s performance is expected to improve markedly in the current fiscal period (a 16% bottom-line rise is currently anticipated).

Glass-half-full investors might be tempted in by this. A forward P/E ratio of 8.9 times provides a margin of safety and bakes in the chances of this positive reading being blown off course, they might argue. And a chubby, inflation-smashing 5.2% dividend yield provides the cherry on top of the cake.

I say that’s wrong, wrong, wrong! There’s a reason why Kingfisher is this cheap and it’s because the broader market has little faith that the home improvement retailer has what it takes to turn things around. A share price fall of 36% in the past year alone illustrates this, and I for one fully expect the Footsie firm to keep on sliding.

Sales slumping

Whilst Kingfisher’s turnaround plan has been a massive disappointment, the significant deterioration in its two key markets of the UK & Ireland and France certainly hasn’t helped. Unfortunately for the B&Q owner, conditions only appear to be getting worse, setting the stage for the possibility of further share price weakness.

Latest quarterlies showed like-for-like sales in France fell 3.4% between August and October, worsening from the 2.4% drop of the first half and driven by a shocking 7.1% revenues fall at its Castorama stores. As if this wasn’t enough, in the UK & Ireland like-for-like sales dropped 0.7% in Q3, worse than the 0.5% reversal in the first half.

Problems across the Channel were the chief driver of group like-for-like sales falling 1.3% in the quarter, and such is the scale of the challenge to turn around its slumping French stores that Kingfisher will exit Russia, Spain and Portugal to double-down on this critical region. Rather worryingly, though, Laury commented that reinvigorating its France region is likely to be “no quick fix.”

A world of hurt awaits for those thinking of snapping up Kingfisher, in my opinion, and it’s a share that should be avoided like the plague. There are plenty of brilliant blue-chip dividend shares that could make you rich, but I’m afraid this embattled retailer isn’t one of them.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Royston Wild 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.