At the end of January, Staffline (LSE: STAF) announced a delay in the publication of its results. Fearing the worst, investors jumped ship sending the stock plunging more than 30% in a single day. That forced management to suspend trading in the company’s shares until it had provided clarity on the accounting issue. Today, Staffline issued this clarification.
As it turns out, it doesn’t look as if this accounting issue is such a big deal. According to the firm’s press release, Staffline has identified “potential underpayments” to staff on minimum wage at “a limited number of food production facilities.” The group, which has been working with HMRC on these issues, says the payment relates to “preparation time, which is generally the time spent donning workwear.”
Staffline has already put aside a provision for possible underpayments. This includes £4.4m for the year ending 31 December 2018 as part of the £20m of exceptional costs announced in its January trading update. However, following advice, Staffline has now increased the value of the provision by £3.5m to £23.5m. This is “the only change against market expectations identified by the board.“
When the company’s auditors have finished reviewing Staffline’s accounts, the group will publish its final 2018 numbers.
Time to buy?
The fact that the accounting blunder isn’t more significant is good news for Staffline’s investors. Indeed, shares in the temporary staffing provider are dealing 34% higher after today’s announcement. However, I’m not a buyer of the stock because I’m worried about its business model.
Staffline’s operating margin is only 2.8%, which is razor thin, and just a small rise in costs could cause profits to evaporate altogether. On top of this, net debt has been rising steadily over the past few years. So while the stock’s 3% dividend yield and forward P/E of 8 might look attractive, I think there are better buys out there, like Direct Line (LSE: DLG) for example.
As one of the largest personal insurance companies in the UK, Direct Line has a strong hold over the market, and it’s highly profitable. The group’s operating margin was 17% in fiscal 2018.
Big profits mean big dividends for investors, and Direct Line doesn’t disappoint on this front. Management has a history of returning all excess cash to investors and, right now, City analysts have pencilled in a dividend yield of 8% for fiscal 2019.
As well as a market-beating dividend yield, shares in Direct Line also trade at a relatively attractive valuation of just 12 times forward earnings. In my opinion, that’s a price worth paying for such a profitable business.
Still, the one place where the company does fall down is on growth. City analysts are not expecting the business to report much in the way of earnings growth over the next two years, which might put some investors off. This is a concern. But when I look at the business, I see it more of an income play than growth investment. I think you should too.
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Rupert Hargreaves owns no share 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.