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A cheap stock I won’t buy despite its 16% dividend yield!

United Carpets Group (LSE: UCG) is, despite its low price, not an income share I want to buy today. I don’t care about its undemanding forward P/E ratio of 12.5 times. The presence of gigantic near-term yields also don’t move me. City analysts expect the home furnishings hulk to pay another 0.42p per share total payout for the current fiscal year (to March 2021). This results in a deep pile 16% dividend yield.

United Carpets is in huge danger of missing this target though, in my opinion. The expected dividend dwarfs annual earnings predictions twice over. On the plus side, the AIM stock is debt free, though its net funds have dwindled of late. These dropped to £1.09m in September from £2.01m a year earlier.

I fear both profits and dividend forecasts for the firm could be sliced down before long, given the shocking rate at which the retail landscape is deteriorating. 

On the floor

The surveys which illustrate the devastating impact the coronavirus crisis is having on retail are beginning to stack up. The British Retail Consortium is one of the bodies that’s shone a light on the sector’s severe recent difficulties.

This showed that prices on the UK high street slipped 0.8% during the first week of March. This was the biggest fall for almost two years and worse than the 0.6% annual decline recorded in the corresponding February period.

It’s abundantly clear the country’s retailers are suffering from evaporating consumer confidence and reduced footfall, due to quarantining measures. United Carpets itself reminded shareholders of the pressure it’s under when, following the shuttering of its 58 stores last month, it advised the measures “will necessarily have a significant and immediate impact on revenues.”

It also withdrew its guidance for both fiscal 2020 and 2021. It cited uncertainty over how long isolation measures will last and how long it will take for retail spending patterns to normalise.

Forget that dividend yield

The coronavirus crisis and its impact on commerce might be front and centre right now. But United Carpets had been in trouble long before Britons were banged up in their homes.

Back in February, the retailer put out a profit warning in which it advised like-for-like sales were down 5.7% in the eight weeks from 20 December. It cited weakened consumer confidence and very competitive market conditions – conditions that have led to “aggressive discounting” from all retailers – damaging business of late.

There are a couple of serious questions that possible investors here need to consider. Will it be able to survive the coronavirus crisis in good shape? And even if it does, will it be able to weather a market still characterised by huge competition? Not to mention weak consumer uncertainty as Brexit fears threaten to drag on and on?

I’m not convinced and would much rather invest my hard-earned cash elsewhere.

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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.