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This 7% dividend and growth stock looks tempting to me

After several ownership structures, the well-known Eddie Stobart road transport brand arrived on the London stock market during 2017 in the care of the public limited company Eddie Stobart Logistics (LSE: ESL).

However, so far, the share price has been sinking and the current 98p or so leaves it almost 40% down from where it started when first listed. The valuation looks tempting with the forward-looking price-to-earnings rating for the trading year to November 2019 just above seven and the anticipated dividend yield a little over seven too. But that’s not the whole story.

Strong growth

Such a bargain rating suggests lacklustre business performance but there’s no sign of that. City analysts following the firm predict that earnings will grow around 17% in the current trading year and by 11% in the year to November 2020. Not only does Eddie Stobart have apparent value, it also appears to enjoy decent growth prospects.

I find today’s full-year report to be encouraging. It revealed that revenue grew a little over 35% compared to the previous year and adjusted earnings per share moved a little more than 16% higher. However, the figure for net debt moved almost 46% higher to almost £160m, which I’m not so keen on. But the directors expressed their confidence in the outlook by slapping almost 9% on the total dividend for the year.

The growth in revenue in the period came from a mix of organic advances, new contract wins and contributions from the firm’s prior acquisitions of iForce Group, The Pallet Network Group, The Logistic People and Speedy Freight. The directors explained in the report that the net debt figure rose because of the acquisition of The Pallet Network Group and due to “working capital investment,” which is “expected to normalise in 2019.”

Reasons to be cautious

I think the debt situation is the one thing that takes the shine off the low valuation and exciting-looking growth prospects. Adjust for the debt, and the valuation doesn’t look as attractive any more. The current figure for net borrowings runs at more than five times the year’s operating profit. I’d want the company to make serious inroads into getting the debt burden down going forward.

Chief Executive Alex Laffey said in the report the company made “significant progress” during the year in delivering its strategy to become “a full-service logistics and supply chain organisation.”

I reckon there’s bound to be a big element of cyclicality in the company’s operations and Laffey said the directors are “mindful of the current political and economic uncertainty,” but he is “confident” the firm’s “unique” operating model will deliver the “flexibility to respond rapidly to changing market conditions.” 

Eddie Stobart is cheap, the dividend yield is high, and the immediate growth prospects look good. But I think that risks can be found in the way high debts combine with the cyclical operations. I see the stock as tempting, but I’d approach with caution and watch any investment closely.

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Kevin Godbold has no position in any 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.