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11%+ dividend yields! Is this unloved FTSE 250 sinker actually a brilliant buy?

What an awful, awful year it’s been for Saga (LSE: SAGA) shareholders. Its market value has shrunk by more than 70% over the past 12 months and, following the fresh sell-off which greeted last week’s trading update, it’s now on the podium for the FTSE 250’s biggest losers so far in 2019.

Saga is in one hell of a pickle right now, and those fresh financials show it still has a lot of work in front of it to even steady the ship.

However, I’m sure there’s plenty a dip buyer sniffing around the over-50s financial services and travel operator on account of its dirt-cheap valuations. At current prices it trades on a forward P/E ratio of 4.4 times — any reading below 10 times is widely considered as bargain-basement territory.

And with City analysts forecasting another 4p per share full-year dividend in the period to January 2020, Saga’s yields sit at an almighty 11.4%. On paper there’s plenty to get stuck into, then. But, in reality, is the company really worth the trouble?

Still in distress?

It doesn’t matter that Saga, which has issued a couple of profit warnings in as many years, declared in recent days it’s still operating within its hacked-down full-year targets declared in early April. Share pickers were also unmoved by news that strategic changes announced back then — like selling insurance products directly to customers and switching back to a membership-driven sales model — are making some progress.

Instead, Saga’s confession that “challenging headwinds in both travel and insurance” grabbed all of the attention, rightly or wrongly. Clearly, market makers are bracing for another profit warning in the weeks and months ahead.

A best buy… or best avoided?

It doesn’t help that chief executive Lance Batchelor announced he’s retiring at the end of the current fiscal year in the days leading up to that AGM statement. Many critics would say a fresh broom is needed after the current leader’s six years at the helm. But questions need to be asked as to what will be left of Saga’s strategic refresh announced just a couple of months ago and what further turbulence can be expected behind the scenes?

Not that there aren’t questions circulating around the company’s transformation plan already, of course. Sure, Saga may have put boosting the membership and developing the product front and centre of its efforts to regain its allure with customers within its target demographic, but could it be argued it’s overestimating the strength of the brand?

Moving away from price comparison websites may provide the obvious benefit of bigger margins, but I certainly believe the business could be underestimating the nomadic characteristics of its core customer base.

The over 50s, like the broader population, are increasingly happy to shop around to get the best financial services or travel products they can for their money, and not beholden to classic brands like Saga.

Its decision to double-back on direct selling is a massive gamble then, and not one I think is destined to succeed. For this reason I think it should continue to be avoided.

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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.