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6% dividend yields! Should you buy this unloved income stock for your 2020 ISA?

For cash-strapped investors looking to load their Stocks & Shares ISA with big-paying dividend yields, Lookers (LON: LOOK) is a share that may well whet the appetite.

Throw together a forward P/E ratio of 8.6 times and a corresponding 6.1% dividend yield and there’s plenty to get excited about. But don’t be fooled. The car retailer is extremely cheap for a reason, and latest financials on Friday illustrated exactly why.

Commenting that recent trading had been “much more challenging than expected”, Lookers advised like-for-like new car sales had dropped 3.2% in quarter three, worsening markedly from the 1.2% fall punched out in the first half. This was also much worse than the 0.6% market decline in the three months to September and prompted the FTSE 250 firm to warn on profits — underlying profit before tax of £20m is now expected.

More bad news!

As if last week’s newsflow wasn’t bad enough, the Society of Motor Manufacturers and Traders (SMMT) cropped up today with more data to chill the bones of Lookers investors.

According to the trade body, there were 143,251 new auto registrations clocked up in October, representing a 6.7% decline from the same month last year. The data shows the rate of decline has worsened more recently too. For the 10 months to October, sales were down by a far more modest 2.9% at a shade over 2m units.

The SMMT noted weakness in 2019 “reflects continued uncertainty over diesel and clean air zones, stunted economic growth and uncertainty over Brexit.” The probability of political vacillation and subsequent economic strain stretching into next year (and possibly beyond) means there’s little reason to expect either private individuals or business to start spending on cars again any time soon.

Bigger dividend cuts?

In the context of recent newsflow then, it looks as if City brokers’ hopes Lookers will bounce from a 63% earnings slump in 2019 with an 8% rise next year are built on pretty shaky foundations. It’s one of the reasons why I’m happy to overlook the retailer despite that sub-10, bargain-basement forward earnings multiple.

As an investor with a particular love of dividend stocks though, it’s the possibility of an even-larger-than-expected dividend cut than analysts currently expect which makes it such a terrible share pick today.

Current forecasts suggest 2018’s 4.08p per share total payout will be scythed down to 2.9p this time out. But, given the possibility earnings predictions of 5.4p per share for 2019 will disappoint, dividend coverage of 1.9 times looks less-than robust.

And on top of this, Lookers has a swelling debt pile to address. As of June, net debt registered at £73.9m, up more than a third year-on-year. Those latest financials of last Friday do little to assuage fears over the balance sheet for this year’s dividend either, and probably next year’s either.

Lookers’ share price has more than halved over the past year and there’s clearly plenty of reasons to expect it to keep sinking. I wouldn’t touch it with a bargepole.

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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.