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Should you buy this dividend stock?

These are dangerous times for share investors. There’s a galaxy of cut-price dividend stocks that look very appealing right now. A great number of them though, are classic investor traps waiting to rob you of your wealth.

Lookers (LSE: LOOK) is one to avoid, even if it offers the biggest dividend yields of all the UK’s listed car dealers. For 2020, this sits at a mighty 14.7%.

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The small-cap’s got all the hallmarks of a possible dividend trap. In addition to that gargantuan yield, it sports a forward price-to-earnings (P/E) ratio around 4 times too. It also announced in March it wouldn’t be paying a final dividend for 2019, on account of the pandemic.

Lookers is fighting a number of serious fires at the same. It’s obvious why share pickers are so keen to give it the cold shoulder.

Corona crisis

It makes sense to begin by looking at the retailer’s most recent troubles, i.e. the coronavirus outbreak. It’s obvious mass quarantining would have a devastating effect on sales of automobiles in the UK. But even so, sales data from the Society of Motor Manufacturers and Traders (SMMT) is quite breathtaking.

According to the body, just 254,684 new units drove off of British forecourts in March. This was down an eye-watering 44.4% year-on-year, it said today, and the worst result since the 1990s.

Consequently, the SMMT slashed its sales forecast for the full year. It now expects 1.73m cars to be sold on the domestic market, down 23% from its previous forecast. Some 2.3 autos were sold in 2019.

More woes

The Covid-19 crisis is something Lookers, and the broader car industry, can ill afford right now. Sales of new vehicles have fallen for three years in a row on a number of issues that still need to be resolved.

The economic uncertainty related to Brexit has also hammered auto sales to both individuals and business in recent times. The virus breakout had clouded the picture even further. But, as things stand, the UK will, by law, exit the transition period at the end of the year. So a financially-catastrophic no-deal withdrawal from the European Union remains on the cards.

There also remains massive confusion over official policy on emissions standards.

A dangerous dividend stock

The retailer threw up more headaches last month when it announced it had “identified potentially fraudulent transactions in one of its operating divisions.” The impact of said activity isn’t thought to be material, though a full investigation was said to be forthcoming.

The news prompted chief operating officer Cameron Wade to leave the company with immediate effect. It also pushed back the release of full-year financials until the second half of April.

Renewed buyer interest has lifted the Lookers share price from the recent record lows, of 11p. I see no reason to load up on the retailer’s stock however. The near-term risks remain colossal and, though it’s cheap, this is a reflection of its massive troubles. Like me, I think you should avoid this dividend stock 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.