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Why I’d sell this FTSE 100 stock yielding 6.1% to buy this 2.1% yielder

At the time of writing, shares in British Gas owner Centrica (LSE: CNA) support a dividend yield of 6.1%, which is one of the highest in the FTSE 100. 

However, while this level of income looks attractive, I think income investors should avoid the business altogether, and buy Compass (LSE: CPG) instead. 

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Two very different businesses

These two companies couldn’t be more different. Centrica operates some of the UK’s critical power infrastructure, while Compass is a global catering business. They also look different from an income perspective. Shares in Compass currently support a dividend yield of just 2.1%, which pales in comparison to Centrica’s 6.1%. 

That said, when it comes to dividend quality, I think Compass stands head and shoulders above its FTSE 100 peer. For a start, the group’s per share dividend payout is covered 2.1 times by earnings. Centrica’s distribution is only covered 1.4 times by earnings per share.

What’s more, the Compass dividend has grown at a compound annual rate of 7.3% over the past six years, in line with earnings growth. Centrica’s dividend has only shrunk over the same period. From 17p per share in 2013, it’s slated to pay out just 5.1p for 2019, a decline of around 70%. Over the same time frame, Centrica’s earnings per share have slumped from 27.6p to 6.8p. 

Not going to end 

In my opinion, this trend isn’t going to come to an end anytime soon. Centrica is facing a buffeting from all directions. Increasing competition, regulators’ demands and political threats are all eroding the firm’s bottom line. Unless there’s a sudden change in the market environment, management is limited in what it can do. Cost cuts have helped slow the decline, but they’ve also hurt customer services, which has only accelerated a customer exodus. 

On the other hand, Compass is flying high. For the past decade, the firm has been pursuing a strategy of using its cash flows from operations to buy up smaller peers in the highly fragmented global catering market.

Management has proven itself to be extremely adept at buying and integrating businesses in this way, and I reckon this can continue for some time. Indeed, analysts project the global catering market is expected to be worth more than $205bn by 2024, that’s compared to the group’s 2019 revenues of around $30bn. 

The bottom line 

So overall, while Compass might not offer the highest dividend yield in the FTSE 100, I’m excited by the quality of the group’s payout and its long-term growth potential.

Centrica might offer a higher yield right now, but looking at the firm’s track record, it seems to me it’s only a matter of time before the payout is cut once again. That’s why I’d sell Centrica today and buy Compass instead. I believe the latter offers a better all-round package for investors. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Compass Group. 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.