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Could this 6% dividend yield be a steal?

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The FTSE 250 has reached decade highs following the conclusive general election result in the UK this month. That’s good news for most shares on the index as in a rising market most share prices tend to also rise. Comparison group (LSE: MONY) is an exception. In the last month, its share price has fallen 8% – could the cheaper share price be an opportunity for investors?

A new breed of business

Moneysupermarket is part of a wave of digital-first or digital-only businesses that have come onto the stock market. Others include Just Eat and Rightmove. For investors, one of the major attractions of these businesses is the ability to keep costs down by being asset-light.

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The City seems to be keen on these new businesses because they’re cash generative and are tapping into changing consumer habits. Although Britons still don’t compare as much as we should, the trend is definitely towards greater use of shopping around for the best deal using comparison sites. 

What this means is they don’t have to maintain, for example, factories or buy materials to produce clothes. They make money by connecting consumers to companies over the internet. In the words of Aleksandr the meerkat, its “simples”. Or is it?

Slowing growth

Despite the advantages of being a dominant player in a growing market, Moneysupermarket still has some growth problems. Group revenues were 4% higher at £100.9m in the three months to September, but that compares badly with the 15% and 19% growth seen in the previous two quarters.

The main detractor from a better performance was its Money division, which represents around 20% of the company’s total revenues and saw revenues drop 5% to £20.6m. This doesn’t seem like a temporary blip either, as the group warned that Money will weaken further in the last quarter as well. 

On the upside, to address these issues, the comparison site is pursuing a new strategy to use first-party data to push personalised deals to consumers. The website is in the second year of its so-called ‘Reinvent’ strategy, which aims to personalise deals for customers, as well as offer new products, such as mortgages.

The dividend

Compensating, in my opinion, for what might well be a temporary slowing in growth is the now very generous dividend. Taking into account special dividends – which may be dropped in future years – the current dividend yield is just under 6%.

Without the special dividend, the cover is 1.5. This means the dividend is sustainable unless earnings drop significantly although a higher level of cover would be better to ensure future dividend growth. With quite a small cover, investors are left relying on earnings growth for the dividend to increase.

I don’t see demand for comparison services going away and Moneysupermarket is a strong brand within the space. The strategy to get growth back on track, alongside the generous dividend in place, makes Moneysupermaket a buy for me, based on the current share price.

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Andy Ross has no position in any share mentioned. The Motley Fool UK has recommended 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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