The Motley Fool

Forget its 6%+ yields! I think this FTSE 250 stock’s a shocking dividend trap

Dixons Carphone (LSE: DC) is a mighty yielder with its back against the wall right now. The electricals retailer was always likely to release some awful full-year numbers last week, but the scale of its problems took even me, a long-term bear on the business, somewhat aback.

Dixons’ nightmares with its core mobiles business are now quite long in the tooth yet remain frustratingly troublesome. A string of impairments here caused the firm to swing to a £259m pre-tax loss for the last fiscal year, from a £289m profit previously.

Consumers are taking longer to upgrade their handsets post-contract, meaning that Dixons needs to pull out all the stops to part them with their cash. And this comes at a cost. Indeed, the FTSE 250 firm says accelerating the integration of its electrical and mobiles units to stem the tide will result in “a significant loss” once again at the latter unit in the current year year. However, it adds these measures should help it to break even at a minimum inside the next two fiscal periods.

Mobiles mashed

I’m not so certain that Dixons has what it takes to achieve this lofty goal, though. It’s not just that the challenging economic conditions for consumers are taking their toll, something which is turbocharging the number of people seeking cheaper SIM-only deals, or other more flexible payment options.

The buzz of having the most up-to-date phone model, whether to show off to friends or just having the latest technology at your fingertips, simply isn’t as strong as it was just a few years back. Just ask Apple why demand for its iPhones is slumping all across the globe.

Sure, Dixons may be spending a cool £275m on those aforementioned restructuring measures, and forking out a fortune to revamp its phone ranges, tariff options, and payment plans to bring them more in line with modern customer demands. But for the moment, I’m prepared to err on the side of caution and anticipate its pain extending beyond the next couple of years.

Are dividends in more danger?

So what does all this mean for Dixons’ dividends? We’d been warned back in December of a dividend cut for the year ended April, and in the end a 6.75p per share total reward was paid, down from 11.25p in the prior period.

The retail giant is hoping to pay out at similar levels in the current fiscal year, though I have my concerns. Aside from the troubles it’s having on the mobiles front, Dixons will also have its work cut out to meet its expectations of sales and profits growth for its electricals business at home and abroad as shoppers reign in spending.

If anything, broader retail conditions in the UK are getting worse, not better, and threaten to continue nosediving given the ongoing impasse over Brexit. At the same time, Dixons’ balance sheet is weakening, net debt on the books swelling to £265m last year from £249m before, and free cash flow falling by almost £20m to £153m too.

For these reasons I’m prepared to look past Dixons’ 6.1% dividend yields and invest my hard-earned cash elsewhere.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.