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Why I’d consider this 5% yielding stock alongside dividend star BP

Oil giant BP pays an attractive-looking dividend in excess of 5%, but I feel a little uneasy about the cyclicality of the oil business. One alternative big-dividend payer is the FTSE 250 gaming firm Rank Group  (LSE: RNK).

You’ve probably heard the name before. The company has been around since 1937, starting out in the production of what it describes as “motion pictures,” a terminology that makes me think immediately of that bygone era. The company moved from films to gaming by focusing on the theme of entertainment.

Flat trading

Last year around 57% of the company’s operating profit came from its Grosvenor Casinos brand, which is “the UK’s largest” multi-channel casino operator. Some 34% came from traditional bingo clubs through the Mecca brand, and 9% came from the operation in Spain, which is branded Enracha.

Today’s third-quarter trading statement revealed flat like-for-like sales for the three months to the end of March, with total revenue rising 1% compared to the equivalent period a year earlier. I’ll admit straight away that you are unlikely to find growth in the figures from Rank, at least for the time being. I last wrote about the company in February 2018 and described how the high street and bricks-and-mortar business had been struggling, but the online operation had been doing well. Sadly, the share price is down almost 30% from the 226p it stood at when I wrote that article and today languishes around 160p.

Earnings have been on the slide, but City analysts following the firm have pencilled in a modest increase for next year. Meanwhile, the fall-back in the shares has pushed the dividend yield up, and there’s no immediate sign that the directors plan to cut the payout. The anticipated yield for the trading year to June 2020 sits at just over 5%, and anticipated earnings should cover the payment almost twice.

A decent dividend record

Despite Rank’s operational challenges, the firm has a decent dividend record, as you can see from the following table, which sets out some of the key statistics in the financial record:

Year to June

2014

2015

2016

2017

2018

2019(e)

Normalised earnings per share

20.6p

15.6p

16.2p

15.8p

17.6p

14.9p

Operating cash flow per share

7.12p

35p

20p

25.1p

21.9p

21p

Dividend per share

4.5p

5.6p

6.5p

7.3p

7.45p

7.45p

The dividend has risen almost 66% over five years and there’s clear support form normalised earnings and cash flow. Meanwhile, offsetting the lack of business growth on offer, Rank sports a modest valuation. The recent share price near 160p puts the forward-looking price-to-earnings ratio for the trading year to June 2020 at just under 11.

I think Rank’s business could be less cyclical than BP’s and the stock is well worth my consideration as a dividend-led investment, with the potential for the firm to post modest growth in the years ahead as it works through the current operational challenges.

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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.