Top British stocks like FTSE 100-listed Compass Group (LSE: CGP) are gearing up to benefit from the recovery. Its share price is up 44% over the last year, although growth has flattened out in recent months.

Compass sells catering services to factories, offices, colleges, sports and entertainment facilities. Its business model was inevitably hit hard by the pandemic.

Top British stocks are fighting back

The bulk of its operations are focused on the US, where lockdowns are easing faster than in the UK. Recent Q3 figures showed revenues down a third to £8.4bn, but the future looks brighter, as canteens reopen and profit margins recover. Management has worked hard to keep costs down, and repaid £25m of furlough support.

Business is picking up and half of new contracts are for first-time outsourcers, up from a third pre-pandemic. The big risk is that the recovery stalls, while the working from home revolution could hit canteen demand, but for now Compass is pointing in the right direction.

Water company Pennon Group (LSE: PNN) is a top British utility stock and could balance Compass nicely. The pandemic has hit profits, which fell 12.3% to £215.3m last year. The group has also entered a tighter regulatory period. Pennon did report a full-year profit after tax of £1.8bn, but this was mostly down to the £1.7bn sale of Viridor.

Management is using the cash to pay down £1.1m of debt. It also plans to buy Bristol Water for £425m. It is also lining up a £1.5bn special dividend and £400m of share buybacks. It’s good to see Pennon rewarding loyal shareholders and this offsets the disappointment of last year’s dividend rebasing.

One downside is that its 1.9% yield is disappointingly low. It is set to rise by 2% above inflation for a five-year period but investors could get a better return elsewhere, for example, from top British dividend stock National Grid, which yields 5.3%. That leaves investors relying on some share price growth to get a satisfactory return, which is not guaranteed.

I’d spend my remaining £1,000 on this recovery play

FTSE 250-listed construction group Balfour Beatty (LSE: BBY) expects to claw its way back to pre-pandemic revenues this year (assuming vaccines see off the Delta variant). As the UK’s second biggest building company, this top British stock should thrive when it’s construction time again.

Balfour Beatty enjoys an average monthly net cash balance of around £600m. It is also raising funds from disposals, and plans to buy back £150m of its shares this year.

When the pandemic hit, Balfour Beatty suspended its dividend. It is now starting to repair this, and has a strong £17bn order book. New infrastructure projects include HS2, Hong Kong Airport and Oak Hill Parkway in Austin, Texas. A word of warning. A second-half recovery is priced into this stock, which could plunge if it doesn’t come through.

These top British stocks are not without risks, but all are keen to reward loyal shareholders and I’d happily invest £1,000 in each.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group and Pennon 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.

Dividend stocks are so attractive because they don’t just give you a regular income, but a rising income, as companies aim to increase their payouts over time. This will help your spending power keep up with inflation. By contrast, money held in cash is likely to erode in real terms. The following two FTSE 100 utility company stocks look dependable income bets for my portfolio.

Water and wastewater specialist United Utilities Group (LSE: UU) offers plenty of buoyancy, despite the stock market storms in March. This FTSE 100 stock now trades 5.4% higher than a year ago, against a drop of 15% across the index as a whole.

Shun cash to buy UK shares

This week, it increased its dividend despite a 16% fall in first-half underlying profit after tax to £174m. The profit drop was due to new price controls and increased infrastructure spending. Covid-19 may have an impact if customers will struggle to pay their bills and bad debts rise. This hasn’t happened yet, but 2021 is likely to be the crunch year. Management still believes existing provisions are enough though.

Crucially for those buying FTSE 100 stocks to generate a passive income in retirement, the board increased the dividend by 1.5%. This is in line with its policy of increasing shareholder payout each year, in line with the CPIH inflation measurement.

Right now, United Utilities yields 4.4%, covered 1.5 times by earnings. That’s far more than I could dream of getting on cash. Naturally, shares are riskier than leaving money in the bank, but United Utilities is relatively safe as FTSE 100 stocks go. A P/E valuation of 14.5 times earnings looks tempting to me.

Sticking with the theme, I’d also include water utility and waste management specialist Pennon Group (LSE: PNN) in my passive income portfolio. Again, this FTSE 100 stock escaped the worst of the March crash and trades around 3.5% higher than a year ago.

I’d buy FTSE 100 stocks for income

Pennon has just announced a 14.5% drop in half-year underlying pre-tax profits, to £86.7m. This was expected, as business customers used less water during the lockdown. It’s now flushed with cash after receiving £3.7bn from the disposal of Viridor. The money will allow it to pay down debt, top up its pension scheme, and still have £2.7bn in the coffers.

The downside of the Viridor sale is that Pennon is now dependent on its South West Water business to fund dividends. The yield is forecast will fall from 4.5% to 2.1%, although it will continue to be increased by CPIH plus 2%.

So what will it do with the cash? Buying Southern Water is one option and that would boost dividends. The other is directly returning spare cash to shareholders. Given the uncertainty, of these two FTSE 100 stocks, I’d rather buy United Utilities today. But I’m keeping a close watch on Pennon.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon 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.

Current economic uncertainty looks set to drag on, and could be worsened by US political dramas. I think these three FTSE 100 dividend shares will help build my wealth, whatever happens in the turbulent months ahead.

I’d buy top FTSE 100 utility stock and dividend hero National Grid (LSE: NG) at any time. This is the ideal bedrock stock for a balanced portfolio. National Grid manages the wires and pipes that businesses and homes rely on for power, both in the UK and north-east US. Its earnings are regulated, so while they will never shoot the lights out, they should provide a reliable flow of cash to fund the dividend.

I’d buy this top UK dividend share

National Grid currently yields 5.16%, which is more than 50 times current base rate. I think it offers a great way to beat the rotten returns on cash, without taking on too much risk. Don’t expect too much share price growth though. The National Grid share price trades at roughly the same level as five years ago. On the other hand, you shouldn’t expect too much downside either. It isn’t cheap, at 17 times earnings, but looks a good defensive UK dividend share for troubled times.

You can get dividends of 8% or 9% on the FTSE 100 today, but that’s not what I’m after here. I want something solid. So I make no apology in highlighting another defensive utility play, water and wastewater specialist Pennon Group (LSE: PNN).

Pennon’s full-year revenues fell 6% as it completed the sale of its Viridor waste management business, and consumption dropped at its South West Water operations. The estimated £10m dip looks manageable and the business remains “resilient”. 

Solid income from the FTSE 100

The big concern is that water companies may struggle to pay their bills due to the economic downturn, although payment collections have been robust so far. The £4.2bn proceeds from selling Viridor have been used to boost the balance sheet by clearing £900m of debt and top up its pension schemes. Pennon was planning to increase its dividend by at least 4% over inflation to 2025. It’s now cut that to 2%, but it remains a compelling UK dividend share, currently yielding 4.4%.

You might think fund managers should be a risky investment in the wake of a stock market crash, but Schroders has recovered strongly in recent months. It posted an increase in Q3 assets under management last month, lifting the total to £66.8bn.

Right now, you can buy Schroders at a bargain price of 13.52 times earnings. For that, you get an attractive yield of 4.4%. While you may see some share price volatility, depending on how the downturn pans out, this UK dividend share looks a strong buy and hold for me.

The post Top stocks for an ISA! I’d buy these 3 solid UK dividend shares to survive the economic downturn appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon 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.

Right now, I would target FTSE 100 companies with a proven ability to increase their dividend, year after year. If they have been able to maintain payouts during the stock market crash, even better. These three UK shares have increased their dividends for the last 10 consecutive years, according to research from AJ Bell. That suggests we can expect plenty of growth in future.

Spirits maker Diageo (LSE: DGE) is never the biggest yielding stock on the FTSE 100. Right now, it yields ‘just’ 2.74%. That doesn’t worry me, though. The attraction with Diageo is that management has a progressive attitude to shareholder payouts. One reason the yield looks so low is that the share price was rising so rapidly (before the stock market crash) that it struggled to keep up.

Stock market crash targets

Management did hold the dividend earlier this month, but these are exceptional circumstances. Diageo’s pre-tax profit dropped by half in 2020, so I think it is quite impressive that management paid a dividend at all.

The Diageo share price inevitably fell in the stock market crash. While people have been drinking more at home during the lockdown, they have drunk an awful lot less in bars, restaurants and pubs. However, the fact that the dividend has kept flowing suggests to me that Diageo has the resilience to resume payouts when the world edges back to normal. Markets believe it will raise its dividend by a decent 4.4% in 2021. That would be more than enough to keep me happy.

Now looks like a good time to invest in sensible defensive stocks such as utilities, and I like the look of water company Pennon Group. Right now, it yields a healthy 4.31%. That looks highly attractive with the base rate at just 0.1%.

I like these 3 FTSE 100 dividend heroes

Although Pennon reported a 4.1% drop in profit before tax in June, partly due to a provision for non-payment of bills during the pandemic, it still upped its total dividend by 6.6%. Markets expect another 4.4% hike next year. The main reason investors buy utilities is for dividends, and I’m sure management will do all it can to maintain payouts. It should remain a relatively reliable source of income, even if we get a second stock market crash.

If you fancy an even higher income, I would check out insurer Legal & General Group. This is another FTSE 100 dividend hero, having hiked its payout for 10 consecutive years. While rival Aviva meekly pulled its dividend during the stock market crash, L&G managements stuck by its payout. Incredibly, markets anticipate an increase of 5.4% next year.

As well as a massive income, the stock market crash has left Legal & General stock trading at a bargain 7.3 times earnings.

I reckon now is a great time to buy all three stocks, with the aim of holding them for years and years, and watching those dividends grow.

The post Stock market crash: 3 FTSE 100 dividend shares I’d buy and hold for the long term appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Pennon 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.

This is the type of company I’d target if looking to build a rising passive income from a portfolio of FTSE 100 stocks and shares. I reckon Pennon Group (LSE: PNN) is a good way to keep the dividend income flowing as you build wealth for retirement and beyond.

The Pennon share price flies

The Exeter-based water utility and waste management company’s full-year results, published today, confirmed another year of real dividend growth, with the payment up 6.6%. That is a tonic for investors, given that so many FTSE 100 companies have cut theirs dividends in the wake of the stock market crash.

Management is now targeting growth of 2% a year above inflation, for the next five years. Even if inflation does fall in the wake of the recession, that protection is valuable. Should inflation take off in the next few years, as some analysts believe, it will be even more handy.

The group has had a busy and successful year, agreeing to sell its waste, recycling, and energy recovery division Viridor in March, for £4.2bn, and recently securing Ofwat’s Fast Track status for its five-year plan.

Despite this, the Pennon share price fell by around 4% today. That mostly reflects profit-taking, after a rip-roaring year. Not many FTSE 100 companies can boast share price growth of a whopping 62% over the last 12 turbulent months.

Even Covid-19 had little impact on its share price. The downside is that Pennon is not cheap, trading at more than 20 times earnings. The yield is a steady 3.58% a year.

Selling off Viridor looks like win-win, as Pennon can now use the proceeds to reduce debt levels, boost its pension fund, and reward loyal shareholders as it sees fit. That should help cover the cost of any rise in late bill payments, as customers struggle for money in the stock market crash and recession.

Stock market crash uncertainty

National Grid (LSE: NG) is another FTSE 100 dividend stalwart but it is not completely out of the woods yet. Last month, it said its dividend is under review due to the pandemic, and promised further updates when it publishes its delayed year-end results this month.

However, management reported little material impact on its financial performance, despite delays and disruption to its capital programme. Its balance sheet is “strong“, with £5.5bn of undrawn committed bank facilities.

The National Grid share price trades 21% higher than a year ago, although it is currently 10% lower than before the stock market crash. It looks slightly cheaper than Pennon as a result, trading at 16.89 times earnings. That would be a good entry price, providing the dividend holds. National Grid currently yields 4.98%.

While some investors will be prioritising oversold bargain stocks right now, these two FTSE 100 dividend stalwarts merit your attention.

The post Forget the stock market crash! I’d buy these 2 FTSE 100 dividend stocks for a rising passive income appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon 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.

However, utilities still offer investors one compelling benefit – electric yields. Is that reason enough to invest?

Working on water

Pennon’s share price dipped slightly after it posted a 1% drop in statutory profit before tax to £260.1m in this morning’s full-year results. However, taking a more positive view, that worked out as an 8.3% rise on an underlying basis to £280.2m after non-underlying items of £19.9m, broadly comparable with last year.

The group also posted a 6.1% rise in underlying revenues to £1.48bn, and a 8.4% gain in underlying operating profit to £350m. Management hailed a “robust performance in 2018/19”, in line with expectations, including £17m of efficiencies. The dividend per share increased 6.4% to 41.06p and the stock now offers a forward yield of 6%, with cover of 1.3.

Waste not, want not

Pennon has to keep investing in the business, pumping in £650m in the current regulatory period, and more than £7bn in total since 1989. Its stock has fallen 22% in the past two years, but that leaves it trading at 12.8 times earnings, a tempting entry point for long-term income seekers.

The group operates both South West Water and Viridor Recycling, and the latter has benefited from the ‘Blue Planet effect’, boosting recycling rates. As Roland Head points out, water gives stable cash flows while recycling offers greater growth prospects, as seen in Viridor’s EBITDA growth of +19.1%. It could nicely underpin your portfolio, unless you fear a Corbyn-style asset snatch.

Low energy

That shadow hangs over Centrica too, but that isn’t the only reason for its dismal share price showing, or even the main one. Centrica stock trades a whopping 75% lower than five years ago as a customer exodus, mild winters, nuclear outages, volatile energy prices, softening upstream revenues, and the energy cap combine to menace profits.

One thing undoubtedly tempts – a forward yield of 11.2%. However, this isn’t to be relied on as almost everyone expects it to be cut soon. There’s a precedent… Centrica cut by 30% in 2015.

That said, a cut wouldn’t be the end of the world given today’s outsize income stream. Even a 50% drop would still give a juicy yield of around 5.5%. If you’re serious about buying Centrica you might be tempted to wait until after the cut, although I suspect it’s already in the share price.

Price looks right

Earnings per share have fallen for five successive years and a further 12% drop is expected in the year to 31 March 2019. However, City analysts reckon earnings could rebound 19% the year after, even though revenue growth looks flat.

GA Chester reckons Centrica has fallen so far it finally looks cheap enough to buy, valued at just 9.9 times forecast earnings for 2020. Now could be a good time to take a position, nationalisation threats notwithstanding.

The post I’m tempted by the low Centrica share price despite a looming dividend cut appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon 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.

Property income

It describes itself as “the UK’s leading manager and developer of student accommodation.” The group has two main businesses, the Unite UK Student Accommodation Fund (USAF) and the London Student Accommodation Joint Venture  (LSAV). These control 25,218 beds and 8,477 beds respectively across 84 properties. 

These assets provide the business with a steady, predictable income stream. Based on letting figures for the 2018/19 academic year (so far 89% of bed spaces are let for this year) USAF’s portfolio has a blended yield of 5.4% and LSAV’s yield is 4.6%.

That being said, unfortunately, if it’s growth that you’re after, Unite will disappoint. According to a trading update published today, at 30 June, USAF’s property portfolio was independently valued at £2.3bn representing a like-for-like increase in value of 1.2% during the quarter. LSAV registered like-for-like portfolio growth of 2.5%. 

Still, it’s my view that using quarterly valuations for property portfolios isn’t relevant because property should be viewed as a long-term investment. Indeed, generating capital growth isn’t Unite’s primary aim. The firm’s focus is to “deliver sustainable growth in our recurring earnings and cash flows,” giving investors a steady, reliable income stream from student property. 

And it’s this focus on cash flow that leads me to conclude that Unite is a great income stock for any retirement portfolio. 

Analysts are expecting the firm to pay a dividend of 28p per share this year, giving a yield of 3.4%. Further growth of 15% is projected for next year giving a prospective yield of 3.9%. 

Preparing for the worst 

The last time I covered utility group Pennon (LSE: PNN), I concluded that the group’s market-beating 6.8% dividend yield, more than made up for the risks surrounding the utility business. 

Since then, the stock has risen by nearly a third and some of the margin of safety for investors has disappeared. However, this defensive income play still supports a dividend yield of 5.2% and I continue to believe that the risks facing water companies like Pennon are overstated. 

Indeed, even though the company is facing tighter controls from regulator Ofwat, Pennon is diversified through its waste management business Viridor.

Viridor’s fleet of energy recovery facilities transforms household waste into electricity and heat. Revenue from this business, at £786m, was higher than Pennon’s water revenue of £571m for 2017/2018, but due to higher levels of capital investment, profit before tax was 61% lower. Nonetheless, Viridor is growing earnings three times faster, and management believes the expansion of its energy recovery facility portfolio will “support Pennon’s earnings growth to 2020 and beyond.” Four new facilities are expected to become commercially operational within the next few years. 

Growth at Viridor, analysts believe, will help support dividend growth of 7% per annum, and earnings expansion of 10% overall for the next two years, leaving shares in Pennon supporting a yield of 5.5%. 

For long-term income seekers, I believe shares in Pennon look to be a great investment. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pennon 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.

My top sector pick

Utility business Pennon Group (LSE: PNN) is my top pick in the water sector. It owns South West Water but also has a profitable waste management business, Viridor. This unregulated business manages landfill sites, recycling and energy recovery facilities, which generate electricity by burning waste.

Together, these businesses have enabled Pennon to increase its dividend by an average of 6.3% per year since 2012. That compares well to water-only rivals such as United Utilities (4%) and Severn Trent (3.1%).

In its latest trading update, it said that South West Water was on track to maintain its sector-best return on regulated equity of 11.8% for the year ending 31 March.

The Viridor waste business also appears to enjoy above-average profitability. Pennon’s half-year results showed an adjusted operating margin of 15.9% for this business, which suggests to me that it has some competitive advantages.

I’d buy and hold forever

I don’t know what the future holds for regulated utilities. There’s a risk of political interference by future governments. There’s also the more immediate pressure of a reduction in the level of returns allowed by the water regulator from 2020.

However, I believe that the risk of renationalisation is probably exaggerated. And the group’s management believe that its high customer service scores and strong operational performance should help to offset regulatory pricing pressures.

I’d be happy to trust Pennon’s management to continue delivering stable results and reliable dividends. The shares now trade on 13.5 times 2018/19 forecast earnings, with a prospective yield of 5.9%. In my view this could be a good entry point for a long-term income buy.

A cash machine

Insurance firm Phoenix Group Holdings (LSE: PHNX) is not a company you’ll find on price comparison websites. This FTSE 250 firm specialises in buying up closed life and pension funds. These are portfolios of policies that are no longer being sold but which need to be run until completion.

The firm’s most recent deal was the £2.9bn acquisition of Standard Life Assurance (SLA), the life insurance business of asset manager Standard Life Aberdeen.

To give you some idea of the scale of the Phoenix operations, this deal will leave the group with £240bn of legacy assets and 10.4m policyholders. The attraction of this business model is that as the policies under management gradually end, significant amounts of cash are released, which can be used to fund shareholder returns.

The company expects the SLA policies to generate £1bn of cash flow between 2018 and 2022, and £4.5bn from 2023 onwards. Management says that this will support further dividend growth.

A buying opportunity?

Phoenix has been a high-yield favourite of mine for some time. The low-growth, specialist nature of this business means that it’s overlooked by many investors.

Despite these risks, I think this could be a rewarding buy for pure dividend investors. Analysts are forecasting a dividend of 50.2p per share for the current year. That’s equivalent to a dividend yield of 6.4%. I’d rate the stock as a buy at this level.

The post Two FTSE 250 6% yielders I’d buy today appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group and Standard Life Aberdeen. 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.

The asset manager has been able to deliver brilliant market-mashing payouts over many years, thanks to its long record of unbroken earnings expansion. And with the City’s team of analysts predicting this perky profits story to continue — rises of 4% and 6% are forecast for 2018 and 2019 respectively — dividends are expected to keep on impressing.

For this year, a 31.2p per share reward is anticipated, resulting in a colossal forward yield of 7%. And thanks to the 32.9p dividend estimated for 2019 the yield jumps to a barnstorming 7.3%.

And to reinforce Jupiter’s investment case, the company deals on a forward P/E ratio of 12.6 times, some way inside the widely-regarded value watermark of 15 times and below.

Hold your nerve

Now, Jupiter has seen its share price collapse in 2018 as fears of slowing business activity have gathered a head of steam. It has lost 30% of its value since the peaks of the year above 630p per share punched back in January.

The company’s latest financial release last week did little to soothe these concerns either, in which it advised that “a period of market turbulence together with subdued demand” during January-March had caused yet more hefty outflows.

Despite current trading turbulence, however, I remain convinced Jupiter should have what it takes to make shareholders a fortune in the years ahead. While market confidence in the global economy is somewhat patchy right now, I am sure that Jupiter’s ongoing steps to diversify its product offerings and its geographic scope should facilitate bumper returns once investor sentiment starts to pick up again.

Dividends flowing higher

Another big-yielding FTSE 250 share worthy of a look today is Pennon Group (LSE: PNN). The business of water management is about as defensive as you can get, and this makes the company an ideal selection for those seeking dividend expansion year after year.

Reflecting these aspects, City brokers expect Pennon to report earnings growth of 10% in both the years to March 2019 and 2020. And as a result, dividends are expected to keep marching skywards as well.

A 38.5p per share payout is expected when the utilities giant reports for fiscal 2018, and this is anticipated to move to 41.4p this year and again to 44.3p in the following period. These estimates mean Pennon boasts chunky yields of 6.3% and 6.8% for this year and next respectively.

Strong profits and dividend growth are not the only things it has in common with Jupiter either as a forward P/E multiple of 12.3 times makes the company a great value pick relative to its anticipated growth trajectory. And this low reading more than bakes in the uncertain regulatory outlook facing Pennon today.

The post Could this FTSE 250 7% yielder make you a fortune? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon 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.

The collapse began on March 8 when it warned adjusted earnings before interest, tax, depreciation and amortisation for the current financial year would miss market expectations by 20% thanks to a “material error in the financial forecasts of the Conviviality Direct business“. 

Following the publication of this news, shares in the company quickly lost more than half of their value. Believing the sell-off was overdone, the next day the CEO and CFO spent nearly £200,000 boosting their stakes in the business. Unfortunately, only five days after these deals, on March 14, Conviviality revealed that it had discovered an unpaid tax bill to the tune of £30m, which is due at the end of March. It seems this came as a complete surprise to the group’s CFO who spent £131,000 buying shares only a few days before. 

Trading in the company’s shares is now suspended as the firm tries to pull itself back from the brink. Management has cancelled the dividend to save an estimated £8.2m and is currently in discussion with its creditors, including HMRC. According to an update issued today, the business is having “constructive discussions” with both its creditors and suppliers and the “possibility of an equity fundraise to effect a recapitalisation of the business” is under consideration. 

Can the business be saved? 

A rights issue or placing looks to be the best solution to Conviviality’s problems assuming the company can work out an advantageous deal with HMRC and its other creditors. 

But even if management does manage to stabilise the firm, it faces an uphill struggle to rebuild investor confidence after recent events. Indeed, the group’s accounting problems show that management has clearly been asleep at the wheel and we just don’t know what else has been missed.  

Put simply, there are many moving parts here, and right now, it’s impossible to tell what the future holds for Conviviality. With this being the case, if it does resume trading, I believe investors should take the hit and sell the shares as soon as possible and instead buy dividend stalwart Pennon Group (LSE: PNN). 

A wide margin of safety 

Pennon provides water and waste management services for 32,000 customers across the UK, making it one of the most defensive businesses around. Unfortunately, shares in the company have lost around a third of their value over the past 12 months as investors have become concerned about the sustainability of the group’s dividend yield, which currently stands at 6.8%. 

The threat of nationalisation from the Labour party, coupled with Ofwat’s promise to force water companies to invest more and profit less, does add some uncertainty to Pennon’s outlook. And in my view, investors should be prepared for a dividend cut in the near future. However, after recent declines, this is already baked into the share price. For example, even if the current dividend distribution is cut in half, the stock would still yield 3.2% and it’s likely management would seek to increase the payout in line with inflation as profits grow at a similar rate. 

So if you are looking for a defensive, predictable dividend play, you should consider Pennon, as right now, it looks as if shares in the company are oversold.

The post Why I’d sell Conviviality plc to buy this hidden dividend stock for my ISA appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pennon 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.