A 6% yielding FTSE 250 stock I’d avoid and a 7% yielding FTSE 100 stock I’d buy

Sometimes alluring fundamentals can be deceptive and rising debt may mean a red flag.

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In a deal worth $2.1bn, Cineworld (LSE:CINE) today announced the planned acquisition of Cineplex in Canada. The Cineplex deal would bring an additional 165 cinemas to the group, widening its North American reach.

I’m not feeling terribly enthusiastic about this acquisition, in all honesty, and it rings alarm bells. Cinema is not what it once was. Many of us now enjoy a close-to-cinematic experience at home, with films on demand, so although a trip to the cinema is still a nice treat, it’s very occasional and low on my priority list.

Escalating debt

It’s also not long since Cineworld acquired US chain Regal in a $3.6bn deal. Since then the FTSE 250 firm has become one of the most shorted stocks on the London Stock Exchange as investors have lost faith. The intention to make this new acquisition with debt seems reckless to me.  It’s ultimately leaving itself open to major losses if footfall decreases and films don’t achieve the success intended. Earlier this month, Cineworld confirmed it missed full-year revenue forecasts for this very reason, blaming disappointing film sequels from the start of the year.

It has a close-to-6% dividend yield, a price-to-earnings (P/E) ratio of 12 and earnings per share are almost 17p. These fundamentals look enticing, but operating margins are low and its willingness to create further debt, by seeking a further $2.3bn in loans to expand, leaves me fearful for its future.

As I said, Netflix and other home streaming options have created so many on-demand TV/Film alternatives that screen time has become run-of-the-mill and a cinema trip no longer has the same charm it once did. It’s also quite an expensive family day out.

For these reasons, I don’t hold out much hope for Cineworld and will avoid the shares.

Can BT bounce back?

Now that the Conservatives have won the general election, BT Group (LSE:BT-A) is no longer at risk of nationalisation. Although the BT share price has taken a nosedive over the past three years, I think it’s on track to emerge stronger in 2020.

It has an attractive dividend yield of 7%, thebP/E ratio is low at 9 and earnings per share are 22p. Its major downfall is its high debt ratio of 73%. If it comes to the crunch, it may have to cut its enticing dividend to meet cash requirements. BT is established, but it works in a competitive environment with high marketing, maintenance and innovation costs.

One aspect I see going in its favour is its involvement in cybersecurity solutions. Cybersecurity problems are real and persistent threats to businesses all over the world. In 2019, sophisticated attacks dramatically increased, and many businesses paid the price both financially and to brand reputation.

BT is heavily involved in cybersecurity, which is vital in its ability to provide a reliable service to customers. It has successful relationships with leading law enforcement and cybersecurity authorities such as Interpol, Europol and the UK National Cyber Security Centre. Just last month, BT sponsored the Cybercrime Cup 2019 in Manchester, which saw virtual teams hone their cybersecurity skills in a competitive gaming contest.

With so much at stake, cybersecurity is becoming ever more vital to society and I think BT is in a good position to help other companies secure their data and communications. I consider the shares a Buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen 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.

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