The Motley Fool

Why I’d avoid this dividend-raising FTSE 250 stock and what I’d buy instead

Given the state of the general stock market this morning, it’s no surprise to see the Clarkson (LSE: CKN) share price down nearly 7% today, as I write. I reckon three things could be affecting the shipping services stock.

First, it’s probably dropping because of general uncertainties and sentiment about the COVID-19 coronavirus and how the outbreak might affect the world economy. Second, shares often fall on the day a company releases its full-year results report. Unless there’s outstanding and unexpected good news in the report, falling on the day is often a ‘thing’.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

And the third possibility is that the report may contain some negative news that the market wasn’t expecting or which wasn’t already baked into the share price. Let’s dig in to find out.

A short-term hit to business

There is indeed a negative. Chief executive Andi Case said in the report that Covid-19 will “impact” the firm’s first-half performance in 2020. So, there are no ifs or buts about that. The coronavirus is causing real economic damage to companies such as Clarkson. This makes me believe the stock market is being rational with its bearish recent moves.

However, Case goes on to say that the company started 2020 with a stronger order book than the year before. And over the medium term, he reckons the “environmental regulatory drivers and supply demand dynamics in the shipping industry are favourable” and he has “confidence” in the firm’s prospects.

But I reckon the company’s niche in the market is highly cyclical. Clarkson says its integrated services and investment banking capabilities to the shipping and offshore markets facilitate global trade. And to me, that means the company’s fortunes are dependent on global trade and the entrepreneurial efforts of others. In that respect, its business reminds me of big banks such as Lloyds, Barclays and HSBC. These also facilitate the business of others.

Good figures

For what it’s worth, in 2019, revenue rose 7.5% compared to the prior year and underlying earnings per share increased by 13%. The directors pushed up the total dividend for the year by 4%, the 17th consecutive dividend rise. That’s a great achievement. But I wouldn’t look at Clarkson as a dividend-led investment and buy the stock purely to harvest that income stream.

The reason is that although the share price has risen a lot over the past 17 years, it’s been moving essentially sideways for the past six or so. And I reckon that’s probably happened because Clarkson has an over-valuation problem. Indeed, with the share price near 2,275p, the forward-looking earnings multiple is just under 18 for 2020 and the anticipated dividend yield is 3.6%.

Meanwhile, City analysts have pencilled in a low, double-figure percentage increase in earnings for the current trading year. But I reckon if a global downturn really gains traction, revised, lower forecasts could leave the valuation looking even loftier. In a scenario like that, I can only imagine the share price moving lower.

My conclusion is the same as it was a year ago: I’d rather invest in a FTSE 250 tracker fund than in Clarkson.

Are you prepared for the next stock market correction (or even a bear market)?

It’s official: global stock markets have been on a tear for more than a decade, making this the longest bull market in history.

But this seemingly unstoppable run of success poses an uncomfortable question for investors: when will the current bull market finally run out of steam?

Opinions are split about whether we’re about to see a pullback — or even a bear market — in 2020. But one thing is crystal clear: right now there’s plenty of uncertainty and bad news out there!

It’s not just the threat posed by the coronavirus outbreak that could cause disruption — Trump’s ongoing trade-war with China and the UK’s Brexit trade negotiations with the EU rumble on... and then there’s the potential threat of both the German and Japanese economies entering recession...

It all adds up to a nasty cocktail with the potential to wreak havoc and send your portfolio into a tailspin.

Of course, nobody likes to see the value of their portfolio fall, but fortunately, you don’t have to go it alone. Download a FREE copy of our Bear Market Survival Guide today and discover the five steps we believe any investor can take right now to prepare for a downturn… including how you could potentially turn today’s market uncertainty to your advantage!

Click here to claim your free copy of this Motley Fool report now.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.