The Motley Fool

I think this FTSE 250 stock could deliver growth and dividends in 2020

When I look at Dixons Carphone (LSE: DC), I can’t be alone in finding the use of the word ‘carphone’ rather quaint in 2020. Still, at least I’m old enough to remember what one of those was, unlike probably most of Dixons’ target market.

But the company has faced a more serious problem than being a bit out of date in recent years. That’s its reliance on the selling of traditional monthly phone contracts, which are falling out of favour.

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And maybe the idea of a dedicated phone retailer is a bit dated too. Even the supermarkets, like Tesco, are muscling in on the market these days.

That’s all had a painfully clear effect on the share price. Dixons Carphone shares have fallen 66% over the past five years, and 28% over just the past two.

Recovery

Saying that, since the middle of August 2019, we’ve seen something of a resurgence. It’s relatively small compared to the longer-term drop, but the share price has gained 40% in the following five months.

Tuesday’s trading update, headlined “Strong performance in sales, market share and customer satisfaction,” gave us some idea why. The update covered the firm’s peak trading period, the 10 weeks to 4 January, a time when many on the high street have struggled.

In the UK and Ireland, like-for-like revenue rose by 2%, with online sales up 7%. Internationally, it saw 3% like-for-like growth, with online up 5%. The company did particularly well in the Nordic countries and in Greece.

The only real downside was a 9% drop in mobile revenues, but that was entirely expected.

Shifting balance

Dixons seems to have captured the trend regarding what electrical shoppers are looking to buy these days. Chief executive Alex Baldock said: “The supersizing TV trend kept on giving as we sold 75% more 65″+ TVs, Dyson Health & Beauty sales were up over 20%, Shark Vacuum sales almost doubled and we sold 8,000 smart speakers each day. We broke records on wearables like Fitbit and Apple Airpods, while gamers couldn’t get enough of the Nintendo Switch. Our new Gaming Battlegrounds showed the exciting potential of more enticing, immersive store experiences and drove strong sales and share gains.”

Buy?

But are Dixons Carphone shares a good value buy now? Before this update, I shared my colleague Royston Wild’s feelings. I was also expecting Christmas trading news to be bad. And there’s no way I’d have bought the shares (or any other high street shares) without seeing a trading update.

Having seen it, would I buy now? Maybe. Dixons Carphone cut its dividend for the year to April 2019 after two years of falling earnings. And with analysts predicting a 33% EPS fall for the current year, I half expected to see a further reduction.

But the current outlook has brightened, and dividend cover that could exceed the predicted two times makes me think the payment is now safe. Analysts predict a return to EPS growth in the 2020-21 year, and I’m more positive about this now that we have the festive trading news.

I’m definitely optimistic about Dixons Carphone shares now.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.