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Forget this momentum stock and its 5% dividend yield! I’d avoid it in January

With Dixons Carphone (LSE: DC) due to release its next trading statement on January 21, I fear that a heavy share price drop could be lurking around the corner.

Christmas 2019 was a period for many retailers to forget as the persistence of Brexit uncertainty caused many consumers to keep their pursestrings firmly tightened. According to the British Retail Consortium (BRC) on Thursday, total retail sales in the UK sank 0.1% last year, making 2019 the worst year on record.

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And chillingly for Dixons Carphone et al, spending levels declined even further over the festive period, down 0.9% year on year according to the BRC.

John Lewis is one of the latest retailing giants to underline the growing stress on Britain’s retailers through less-than-cheery Christmas results that were also unpacked on Thursday. The department store group saw like-for-like sales drop 2% between November 17 and January 4, it said, continuing the steady deterioration in its top line.

Tech sales tank

What will come as particular concern to Dixons Carphone and its investors, though, is that sales of electricals and home technology products at John Lewis fell 4% from the same period 12 months earlier, suggesting that things have hardly improved in the wider market since FTSE 250 company Dixons Carphone’s own trading update of December.

Then it advised that adjusted pre-tax profits had shrunk to £24m in the six months to October from £60m in the corresponding 2018 period. The company’s update indeed suggested that trading conditions have worsened here too of late, a 2% drop in like-for-like sales recorded in the second fiscal quarter versus the 2% rise recorded in the prior three-month period.

It’s not a shock to see City analysts predicting that DC’s profits will drop 34% in the financial year ending April 2020. And in the current climate, it’s difficult to see how or when the tills will start getting noisier, what with Brexit uncertainty threatening to persist all the way through to the end of next year at least.

More dividend woe?

What’s more, the collapsing profits at Dixons Carphone, and the massive investment it is making in its staff and its stores to pull customers back through its doors, casts doubt over whether the business will grow again following last year’s dividend cut.

According to current analyst consensus, a total payout of 6.88p per share is due this year, up from fiscal 2019’s 6.75p dividend. But I think that the retailer’s gigantic £1.6bn net debt pile (as of October) and its murky sales outlook suggests that another cut in fact could be in order.

So despite its bargain forward price-to-earnings (P/E) ratio of 10.2 times and large 5% dividend yield, I’m not buying. Indeed, the inexplicable (at least in my opinion) 12% share price ascent since the beginning of December heightens the risk of a whopping share price drop later this month, in my opinion. It remains a share to be avoided at all costs.

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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.