I’ve just been working down the full list of FTSE 100 stocks, and there are some astonishing yields around right now. The following two companies caught my eye with some of the highest yields around, but there are risks. Should you buy either of them?
Russian steel producer Evraz (LSE: EVR) is quite some stock. Right now, it looks set to yield an incredible 13.7%, the highest on the entire index. Of course, this will start alarm bells ringing for many. It has been called the riskiest stock on the entire FTSE 100, because management has got into the strange habit of running up debts, while lavishing money on shareholders.
Last year’s half-yearly report said net debt increased by $79m to $3.65bn, largely due to the recognition of additional liabilities under new IFRS 16 financial reporting standards. Net profit fell sharply to $344m, down from $1.15bn year on year, due to falling steel prices. Depressed vanadium prices, lower average coking coal prices, and the lifting of US tariffs on Canadian steel imports didn’t help.
Management still lavished shareholders with more than $500m in dividends, citing a positive outlook, the strength of the Russian steel market, and its continuing efforts in efficiency improvements. Last week’s Q4 trading update was broadly positive, with crude steel output up 2.1% over the quarter, and steel product sales up 6.6%.
The Evraz share price is valued at just 7.5 times earnings, which looks a bargain. Its yield is forecast to fall to 9.3% in 2020, but that is still hugely generous. The 35.16 payout is expected to be covered 1.57 times by forecast earnings of 55.32p. I can’t find anything particularly disastrous in these figures, making it a tempting buy, but I’m also a bit unsettled. I don’t quite understand what management is up to, and as Warren Buffett said: “Never invest in a business you cannot understand.”
British Gas owner Centrica (LSE: CNA) used to be called a defensive stock, but nobody uses that term today.
The Centrica share price now trades 70% lower than it did five years ago, turning a £10k investment into just £4k including reinvested dividends, after a dismal period for the company. Centrica was punished by falling energy prices and disgruntled home energy customers, who switched to cheaper rivals in droves, triggering a blizzard of profit warnings and dividend cuts.
Until recently, the prospective yield briefly stood at 13.68%, but please don’t buy expecting that kind of income today, because the rebased payout currently offers a forecast yield of just 5.5% for 2020.
I feel more comfortable with this, especially since earnings are now expected to rise 31% in 2020. That would see the anticipated 5.03p payout covered 1.66 times by earnings of 9.13p a share, which looks a lot more sustainable.
There are signs of a share price recovery in recent weeks, which suggests that Centrica may finally be finding its feet. I’d shop around, though, because you might find more solid FTSE 100 high yielders out there.
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Harvey Jones 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.