Shifting business model

Stagecoach used to be one of the largest rail franchise operators in the UK, but in April the group was disqualified from bidding on three rail franchise contests because of “non-compliant bids.“

The company is taking the government to court over its decision to exclude it from the bidding process, and the cases are expected to be heard in the High Court in early 2020.

In the meantime, Stagecoach is primarily a bus operator. It has a strong track record in this business. The company has managed most of the buses in London for some time, and management believes that this track record puts the group in a prime position to win contracts that are up for re-tender during the next few months.

Stagecoach says that it is on track to hit full-year expectations for growth, and is continuing with its plan to return £60m to shareholders via a share buy-back, according to a trading update published this morning.

Analysts believe the company will earn 14.5p per share for 2019, which puts the stock on a forward P/E of 9.1. In my opinion, this multiple slightly undervalues the business. The rest of the transportation sector is trading at a forward P/E of 11. On top of the discount valuation, shares in the public transport operator support a desirable dividend yield of 5.8%.

International diversification

If Stagecoach is not for you, another FTSE 250 income champion that I reckon could be an excellent investment for a Stocks and Shares ISA is IG Group (LSE: IGG).

City analysts are expecting IG to report a 7.4% decline in earnings per share for fiscal 2020. Regulations introduced to try and stop inexperienced traders taking on more risk than they can afford are weighing on group profitability.

But IG has more to offer than leverage trading products. The company also provides a stockbroking service and has operations around the world.

Returning to growth

IG’s diversification has helped the company in the face of regulatory changes. Analysts believe it will return to growth next year.

Based on the current City estimates, shares in the financial services group are trading at a forward P/E of 14.8, falling to 13.2 for fiscal 2021. On top of this, the stock supports a dividend yield of 7.4%. Unfortunately, this distribution is not wholly covered by earnings per share, which is a concern.

That being said, IG does have £310m of net cash on its balance sheet. According to my calculations, with the dividend costing around £170m per annum, the cash balance is enough to sustain the payout for nearly two years if profits evaporate.

On that basis, I reckon income investors can buy the shares safe in the knowledge that the dividend is here to stay for the foreseeable future.

The post 2 FTSE 250 dividend stocks I’d buy for a Stocks and Shares ISA today appeared first on The Motley Fool UK.

More reading

• £10k invested in the FTSE 100 at the start of the decade is now worth…
• 2 stupidly cheap shares to consider buying now to try and make a million
• Investors can’t stop buying these UK shares
• P/Es below 7! 3 staggeringly cheap shares despite yesterday’s rally

Rupert Hargreaves owns no share 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.

In contrast, FTSE 100-listed Glencore (LSE: GLEN) appears to have a wide margin of safety. The company has the potential to generate improving financial performance, with the risks it faces seemingly priced in.

Alongside another FTSE 350 dividend share that released a positive update on Wednesday, now could be the right time to buy Glencore.

Low valuation

The other company in question is transport business Stagecoach (LSE: SGC). Its trading statement showed it has performed relatively well, with positive progress in its UK Rail Division. Its performance was ahead of expectations, reporting good underlying revenue trends. As a result, the company expects group adjusted earnings for the full year will be ahead of previous guidance.

Revenue growth in its UK Bus (regional) operations has been similar to that reported in the first half of the year, with increasing market share delivered. In its UK Bus (London) division, Stagecoach has undertaken a review to identify opportunities to improve its performance on Transport for London tenders. This could help deliver improved performance in a competitive environment.

With the stock having a price-to-earnings (P/E) ratio of 9, it seems to offer good value for money. A dividend yield of 5%, and the fact that shareholder payouts are expected to be covered twice by earnings, shows it may also offer income investing potential over the long run.

Improving prospects

As mentioned, Glencore may have a bright future. Certainly, there are risks facing the company, as well as the wider resources sector. A slowing China remains a key concern for the business, with its recent data showing the world’s second-largest economy is experiencing a challenging period. This could lead to weaker investor sentiment, as well as profit growth that’s more limited across a variety of segments within the wider resources industry.

However, this risk seems to be priced into Glencore’s valuation. It currently trades on a P/E ratio of 8.6, which suggests it offers a wide margin of safety. Its risks have also fallen in the last few years as it reduced debt and sought to improve efficiency.

With Glencore having a dividend yield of 5.3% from a payout that’s covered 2.2 times by profit, it seems to offer income investing appeal. Although it may be a less stable business than a number of other FTSE 100 income shares, it could nevertheless deliver dividend growth in the long run. As such, for less risk-averse investors, now could be the right time to buy the stock while it trades on a low earnings multiple.

The post Forget buy-to-let. I’d put my money into FTSE 100 dividend stock Glencore appeared first on The Motley Fool UK.

More reading

• Why the stock market is shifting back to an earnings-driven regime
• Around £5 now, here’s why this overlooked FTSE 100 heavyweight seems a bargain to me anywhere below £10.92

Peter Stephens 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.

The decision cost the company just over £86m, but it was the reputational cost that hurt more than anything else.

Before the problems with the franchise first emerged, the stock was changing hands for more than 400p. It slumped to 130p at the end of March last year and has since struggled to move much higher.

Making a comeback 

After the East Coast rail debacle, there’s been fears Stagecoach’s reputation with the government would never recover. However, as it turns out, these fears might have been overblown. Today, the company announced that the Department for Transport (DfT) has agreed to extend its franchise on the East Midland line. The contract extension is only until 18 August, but this is longer than analysts have been expecting. 

The company expects to earn a “modest profit” under the revenue-sharing agreement inked with the DfT.

Dividend champ

Rail is just part of the Stagecoach empire. The rest of the business is humming along nicely. Management recently agreed to sell its North American division to a private equity buyer for $207m. The proceeds of this will be used to reduce the debt which, in my opinion, will make the enterprise a much more attractive income investment. Indeed, when it comes to income, Stagecoach stands out to me as an FTSE 250 income giant.

Even though the City has pencilled a decline in earnings per share of 20% between now and 2020, the fact that the payout is covered twice by earnings per share means that even after this decline, Stagecoach’s dividend appears safe. 

The stock currently supports a dividend yield of 5% and, right now, you can buy this income for a P/E of just 7.8. That’s why I am eyeing up the company today.

Unique business 

Another unloved FTSE 250 income stock I think is worth your further research time is Halfords (LSE: HFD).

Investors rushed to sell this company after it issued a shock profit warning at the beginning of 2019. Management informed investors it now expects underlying pre-tax profit to fall around 15% year-on-year, after a rough Christmas.

At first glance, this forecast seems disappointing. But, as my Foolish colleague Roland Head recently pointed out, Halfords’ debt is low and the group’s cash generation has historically been quite strong. On top of this, management made a fresh commitment to the dividend back in September, so I’m confident that the dividend, which currently stands at 18.2p per share, is here to stay.

With this being the case, I would buy into Halfords’ current dividend yield of 7.8%. A P/E of just 9.7 makes the opportunity even more attractive, in my view.

Of course, if the retail environment gets much worse and earnings slump, there’s a chance the dividend could be cut. But I think Halfords has what it takes to weather the storm because its two key markets are motoring sales and outdoor activities which, unlike retail, don’t suffer the same vicious competition and thin profit margins. What’s more, Halfords is the market leader for both of these product lines.

The post £5k to invest? Here’s two hidden FTSE 250 income giants I’m eyeing up today appeared first on The Motley Fool UK.

More reading

• 13,000 more reasons why I’m avoiding IAG shares!
• This FTSE 250 stock fell by over 3% after solid earnings. Should investors consider buying it?
• £10,007 invested in Aston Martin shares on 1 April is now worth…
• Why NOW could be the best time to find stocks to buy!
• £1,000 buys 297 shares in this beaten-down UK housebuilder with a £700m opportunity

Rupert Hargreaves owns no share 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.

The stock’s decline can be blamed on Brexit and the risk of a UK recession. But I think it’s also fair to say that 10 years after the financial crisis, many investors are still unsure about banks generally.

I think these concerns may be overdone. Although we can’t know what will happen next year, I’m optimistic about the outlook for RBS. Here are three reasons why I remain a buyer.

1. Problems solved

RBS has had a fair number of legacy problems to solve since the financial crisis. This has taken some time, but the process is largely complete following this year’s $4.9bn (£3.6bn) settlement with the US Department of Justice.

Looking ahead, the firm’s profits should be less affected by legacy issues. This is expected to pave the way for the government to gradually sell its remaining stake in the bank.

2. Dividend restart

This year’s US settlement also led to another important milestone. RBS was able to pay a dividend for the first time since March 2008.

August’s 2p per share interim payout was fairly modest. But analysts expect the dividend to rise rapidly from here on. A total payout of 6.8p per share is expected for 2018, climbing 55% to 10.6p per share in 2019.

These forecasts give RBS stock a 2019 dividend yield of 5%, comfortably ahead of the FTSE 100 average of 4.5%. This payout looks very affordable to me too, as City forecasts indicate that it should be covered 2.6 times by earnings.

3. Cheap at this price

I think the bank’s progress this year has left its shares looking cheaper than they deserve to be.

At the time of writing, RBS shares were trading at 209p. This puts the stock at a 27% discount to its tangible book value of 288p, and gives a forecast price/earnings ratio of 7.5.

This seems too cheap to me, especially given the stock’s growing dividend yield. I continue to hold my shares, and would be happy to buy more.

An unloved dividend bargain?

Another sector that’s unpopular with investors at the moment is public transport. The share price of bus and train operator Stagecoach Group (LSE: SGC) has fallen by 35% over the last two years.

Although some of this decline has been due to weaker profits, I think the stock’s de-rating may have gone too far. Management is taking steps to strengthen the business and today, announced the sale of its US operations for $271m. I estimate this to be about 10 times last year’s operating profit, which seems a fair price to me.

My thoughts

Cash from the US sale will be used to reduce Stagecoach’s net debt of £461m to a more comfortable level. This should make it easier for the firm to invest in new UK opportunities and provide stronger support for the dividend yield of 5.5%.

Stagecoach isn’t out of the woods yet. Earnings are expected to fall again in 2019/20, suggesting further challenges lie ahead.

Despite these risks, I think the stock’s forecast price/earnings ratio of 7 looks good value. Worth a closer look, in my opinion.

The post Why the RBS share price is on my FTSE 100 ‘buy’ list for 2019 appeared first on The Motley Fool UK.

More reading

• Around £5 now, here’s why this FTSE banking giant looks a bargain buy anywhere below £12.67
• How much is needed in a SIPP to target a £25,095.20 annual income
• A 7.1% forecast yield and 51% below ‘fair value’! 1 of my top FTSE stocks to buy right now
• Here’s how FTSE 100 stocks could help an investor double their State Pension with a £25,150 annual income

Roland Head owns shares of Royal Bank of Scotland Group. 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.

Of course, it’s not the only stock which could generate impressive returns in the coming years. Reporting on Wednesday was a FTSE 250 share which seems to have an improving outlook in my opinion.

Impressive performance

The company in question is transport business Stagecoach (LSE: SGC). Its first-half results were ahead of expectations, with its share price gaining around 9% following the release. It benefitted from strong profitability in the Virgin Rail Group, while it was able to reach a positive resolution of contractual matters for the former South West Trains franchise. Its adjusted earnings per share of 12.9p was better than market forecasts, while its performance for the full year is expected to factor in the strong first-half period.

With Stagecoach having a dividend yield of 4.8% from a dividend which is covered 2.2 times by profit, it seems to be in a good position to deliver improving income returns in the long run. Although there is still work to be done on successfully implementing its strategy and its earnings growth forecasts for the next couple of years are somewhat disappointing, its long-term total return potential seems to be impressive. A price-to-earnings (P/E) ratio of 9.3 indicates that the stock includes a wide margin of safety. As such, now could be the right time to buy it.

Recovery stock

When Standard Life Aberdeen contemplated its merger, it probably had higher hopes for how it would turn out in the first year than has been the case. The stock has dropped in price by 47% in the last 12 months, with investors seemingly unimpressed with its operational and financial performance thus far as a combined entity. In the current year, for example, a 23% decline in net profit is expected as customer losses and a restructuring weigh on its financial outlook.

Investors, though, appear to have factored in potential challenges for the stock. Standard Life Aberdeen has a P/E ratio of just 10, which is relatively low compared to its industry peers. It also offers a dividend yield of over 9% at the present time. Although its dividend cover is expected to be just 1.1 in the current year, earnings growth of 9% are forecast for next year. This could help to improve its dividend affordability and provide investor sentiment with a potential catalyst. As a result, the stock seems to offer turnaround potential and could deliver improving long-term performance after a challenging period.

The post Could Standard Life Aberdeen boost your retirement income as the State Pension age rises? appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £1,456 monthly passive income?
• Hunting passive income? Consider these high-yielding FTSE 250 dividend stocks to buy in May
• How much would a Stocks and Shares ISA need to be to target £3,215 a month in passive income?
• 4 FTSE 250 shares that could generate a 4-figure monthly second income
• How can I target £14,132 a year in dividend income from a £20,000 holding in this FTSE 250 dividend gem?

Peter Stephens owns shares of Standard Life Aberdeen. The Motley Fool UK has recommended 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.

Today I want to look at one share I’d buy and one I’d sell after recent news. Let’s get the bad news out of the way first.

Strikes prove costly

The share price of budget airline Ryanair Holdings (LSE: RYA) was down by 10% at the time of writing on Monday, following a profit warning.

The firm says that profits for the year to 31 March 2019 are now expected to be between €1.1bn and €1.2bn. This represents a reduction of about 10% from previous guidance of €1.25bn to €1.35bn. Ryanair said that rising fuel costs and disruption caused by strike action are to blame for the cut.

The full cost of repeated strikes appears to be rising. In today’s statement, the airline admits that forward bookings and ticket prices for the final quarter of the year are lower than expected. Understandably, customers aren’t too keen on booking tickets when so many flights are being cancelled.

New EU rules on compensation for passengers left stranded by strikes are also adding to the total cost of the disruption.

Too clever by half?

Airlines shares have fallen after today’s news from Ryanair. This suggests that markets are pricing in an uncertain outlook for the wider sector. But my feeling is that Ryanair’s problems may be due at least partly to chief executive Michael O’Leary’s famously aggressive approach to costs, including staff.

Mr O’Leary complains that strikes are being “incited by competitor employees”. I’ve no idea if this is true. But it does seem that Ryanair crew feel they are getting a worse deal than staff at rival airlines.

Budget rival easyJet (which I hold) confirmed last week that its full-year profits would be in the upper half of previous guidance. This seems to support my view that Ryanair’s problems are at least partly self-inflicted. For this reason, I rate the shares as a sell.

A safer alternative?

My stance on airlines isn’t without risk. If you’re concerned about the impact of rising fuel costs on airline profits, then one alternative might be to consider investing in bus and train operators.

Bus and rail group Stagecoach (LSE: SGC) has lost nearly 50% of its market value over the last three years and now looks very cheap to me. Rising fuel prices could be good news for this firm, as drivers might consider ways to cut down on car usage.

These numbers tell me to ‘buy’

Stagecoach’s cash flow and debt look acceptable to me, but I’m especially attracted to the group’s generous earnings yield of 10%. This ratio compares operating profit with enterprise value (market cap plus net debt). It tells me how much profit a company is making relative to its overall valuation, before interest and tax costs.

One potential concern for equity investors is that analysts are forecasting a 10% reduction in earnings next year.

That’s not ideal, but personally I think this bad news is already reflected in the stock’s modest valuation. Stagecoach shares currently trade on just 8.5 times 2018/19 forecast earnings, with a prospective yield of almost 5%. At this level, I see it as a low-risk dividend buy.

The post One bargain FTSE 250 dividend stock I’d buy in October (and one stock I’d sell) appeared first on The Motley Fool UK.

More reading

• 13,000 more reasons why I’m avoiding IAG shares!
• This FTSE 250 stock fell by over 3% after solid earnings. Should investors consider buying it?
• £10,007 invested in Aston Martin shares on 1 April is now worth…
• Why NOW could be the best time to find stocks to buy!
• £1,000 buys 297 shares in this beaten-down UK housebuilder with a £700m opportunity

Roland Head owns shares of easyJet. 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.

Slowcoaches

Stagecoach, which runs trains, buses, trams and express coaches in the UK, US and Canada, has had a bumpy journey in recent years, but today is back on track. The stock is up around 2% today on publication of a broadly positive trading statement where management declared itself “pleased to have made a good start to the year” with its adjusted earnings per share (EPS) forecasts broadly unchanged.

The £913m company isn’t firing on all cylinders, though. Year-to-date like-for-like revenues rose 3.2% in the 16 weeks to 18 August in its UK Bus (regional operations) division, 2.1% in UK Rail (excluding Virgin Trains East Coast), and 5.3% in Virgin Rail Group. But other parts of the business have stalled. UK Bus (London) revenues were down 2.2%, while North America was down 3.8% in the four months to 31 August.

Tender trap

Stagecoach has lost the South West and East Coast rail franchises in the past two years and missed out on some recent London bus tenders. Today management admitted it was “disappointed” with its performance on tenders for Transport for London contracts, which will accelerate the rate of revenue decline later this year.

The stock is nonetheless up 18% in three months, but trading at 8.9 times earnings it still looks cheap. The dividend is less eye-catching than before but still decent at 5.2%, with cover of 2.2. Earnings forecasts worry me though, with an expected 18% drop in the year to 30 April 2019, and 9% the year after. Yes it looks cheap, but its hardly an unmissable bargain.

Floored

Paving and flooring products business Marshalls (LSE: MSLH) saw its share price spike almost 15% to 483p in mid-August after it reported a 12% rise in interim pre-tax profits to £32.5m, despite the ‘Beast from the East’ taking a £9m bite out of its sales.

Revenues also grew 12% to £244.3m amid strong recent trading and healthy order intakes, putting it on course to meet full-year expectations. Investors reaped the rewards with an 18% increase in the interim dividend to 4p a share, which means the stock now offers a steady forecast yield of 3.3%, covered 1.7 times.

Quite Beastly

This £877m company has done well to fight both Brexit and the Beast, although its share price has retraced most of last month’s spike. It isn’t cheap, trading at a forecast 17.6 times earnings but earnings growth looks healthy with EPS forecast to jump 14% in calendar year 2018, and another 7% in 2019. 

That does mark a slowdown on recent years. EPS growth was 46% in 2014 and 41% in 2015, so we may not see a repeat of the recent strong share price performance, which saw the stock grow 145% over five years. My Foolish colleague Royston Wild remains a major fan, praising the company for posting strong growth in the face of wider economic fears. Today it is cheaper than when he tipped it, and well worth a look.

The post Why I’d buy this FTSE 250 growth and income stock today, but shun the other appeared first on The Motley Fool UK.

More reading

• This cheap share could turn £1k into £1,761 over the next year

harveyj 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.

Today I’m going to look at three stocks which each offer a yield of at least 5%. All three pass my dividend safety tests. Indeed, I’ve already added one of these shares to my own portfolio.

Flying higher

I’m going to start small with £59m jet chartering specialist Air Partner (LSE: AIR). In addition to passenger services, this 50-year old firm provides cargo and emergency planning services for government and corporate customers.

Air Partner’s share price took a knock last year when it discovered some historic accounting irregularities. But this appears to have been a one-off problem. Pre-tax profit rose by 20% last year and management has said that trading so far this year is in line with expectations.

Broker forecasts for 2018/19 suggest that earnings will rise by about 5% to 8.9p per share. The dividend is expected to rise to 5.6p per share. These projections put the stock on a forecast P/E of 12.5 with a prospective yield of 5%. With a history of strong profitability and steady growth, I rate the shares as a buy at this level.

Taking the high road

Another opportunity in the transport sector is bus and rail operator Stagecoach Group (LSE: SGC). This well-known firm operates in the US and Canada as well as the UK, so the group’s profits aren’t dependent on a single market.

One problem faced by the firm recently was the loss of the East Coast rail franchise, which Stagecoach operated in partnership with Virgin Trains. This business contributed about 14% of operating profit, and its loss triggered a dividend cut last year.

However, the reduced dividend should be covered by non-rail free cash flow, making it a much safer payout.

I believe last year’s bad news is in already reflected in the group’s share price. And with the stock now trading on less than 10 times earnings, with a forecast yield of 5.3%, I’d be happy to buy.

Postal gains

The latest addition to my personal portfolio is Royal Mail (LSE: RMG). These shares have fallen by 26% from a May high of 632p. But I see little in the group’s outlook to justify such a gloomy view.

May’s full-year results showed that adjusted operating profit rose by 6% to £581m last year. Profit margins were broadly stable at 5.7%. And strong cash flow helped the group to repay net debt of £338m and finish the year with net cash of £14m.

Although the shift from letters to parcels will continue to require investment, these costs seem to be under control. The group’s 53% share of the parcel market provides a strong foundation for long-term planning, and is also helping to support growth in the group’s international business.

Industrial relations — a historic source of concern — seem to be improving. Strike action has been averted and the company says good progress is being made on pay and pension reforms.

All in all, I think Royal Mail looks too cheap at around 465p. So I was quite happy to pay 12 times forecast earnings to secure the group’s 5.4% dividend yield for my portfolio.

The post 3 stocks I’d buy with dividends yielding more than 5% appeared first on The Motley Fool UK.

More reading

• 13,000 more reasons why I’m avoiding IAG shares!
• This FTSE 250 stock fell by over 3% after solid earnings. Should investors consider buying it?
• £10,007 invested in Aston Martin shares on 1 April is now worth…
• Why NOW could be the best time to find stocks to buy!
• £1,000 buys 297 shares in this beaten-down UK housebuilder with a £700m opportunity

Roland Head owns shares of Royal Mail. 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.

Since its near-death experience in the financial crisis, Persimmon has been on a mission over the past decade to rebuild its reputation. 

As part of this goal, the group has introduced a Capital Return Plan, which was initially targeting a surplus capital distribution to shareholders of £6.2 per share between 2012 and 2021. But, thanks to better-than-expected trading, it’s been increased by 110% to £13.00 per share to 2021. 

So far, the group has only distributed £6.20 with a balance of £6.80 remaining. If it hits this target, Persimmon will return 27% of its current market value between today and 2021 (9% on an annual basis).

With cash on the balance sheet of £1.3bn, it certainly looks to me as if the group has the financial firepower to hit this target. At the same time, the stock trades at a highly attractive forward earnings multiple (P/E) of 9.4. So, Persimmon is both an income champion and value stock.

Look past the problems 

Galliford Try (LSE: GFRD) is another dirt-cheap income stock I believe could make a great addition to any portfolio.

Even though analysts have revised down their expectations for growth in 2018 and 2019, Galliford’s earnings per share are still expected to grow 12% in 2018 to 146p, and register a small, positive expansion next year. 

Based on these estimates, shares in the homebuilding and regeneration group are trading at a forward P/E of 6.3 — the lowest valuation the market has awarded the company in over five years.

That said, analysts are expecting a slight downward revision of the group’s dividend this year. The City’s target is 77p, down 11% from last year’s 86p. 

Still, even at the lower level, the payout is equivalent to a dividend yield of 8.4% and it’s also covered 1.9 times by earnings per share, leaving plenty of headroom if earnings contract.

As my Foolish colleague Harvey Jones recently noted Galliford isn’t without its problems, but management seems to have operational issues in hand, and the issues certainly don’t seem to justify the rock-bottom valuation.

Margin of safety 

Shares in transport group Stagecoach (LSE: SGC) have taken a hammering after it was revealed that the company, and its partner Virgin Group, have taken a loss of more than £200m on their East Coast franchise, which operates intercity services between London Kings Cross and Scotland. 

Now, analysts are expecting nothing but pain for the group for the next few years. City analysts reckon EPS could fall 18% in the year to 30 April, then by 11% and 9% in the two years that follow. 

While it’s difficult to feel enthusiastic about Stagecoach’s falling earnings, the company’s dividend yield provides some solace as it currently stands at 8.3%. 

And even though profits are set to slide, even the most pessimistic analyst forecasts suggest dividend cover will remain above 1.5 times for the next two years. With this being the case, it looks as if the payout is here to stay for the foreseeable future. 

Moreover, while the company might not have the brightest growth outlook, the stock’s valuation of 7 times forward earnings (P/E) offers a wide margin of safety in my view.

The post 3 cheap 8%-yielders you can’t afford to miss appeared first on The Motley Fool UK.

More reading

• How to target a £1m Stocks and Shares ISA by investing £511 a month
• Starting with £10,000, how could someone aim to earn an annual second income of £12,548 from UK shares?
• £7,775 invested in Persimmon shares 5 years ago is now worth…
• Here’s how £20,000 in this overlooked FTSE gem could make investors £9,089 in annual dividend income over time
• How to aim for a brilliant £29,295 yearly passive income starting with just £7.77 a day in an ISA

Rupert Hargreaves owns no share 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.

Nice Try

Let’s start with house builder Galliford Try (LSE: GFRD), which has a market cap of £1bn and currently pays the most generous yield on the FTSE 250, a stonking 9.02%. House builders have had a tough time since Brexit but Galliford Try’s performance has been particularly disappointing, falling 11% in the two years, while Bovis Homes is up 31% and Persimmon up 35%.

Galliford Try has had problems of its own, suffering £98m over-run costs on its Aberdeen bypass contract, and up to £40m following the compulsory liquidation of Carillion. Management launched a £157.6m rights issue, completed in April, despite having the funds to meet all its obligations. It said the losses meant diverting capital from its Linden Homes and Partnerships & Regeneration businesses, which might miss out on some attractive growth opportunities.

Aberdeen anguish

Last month, Galliford Try reported full-year results were on track, with underlying debt lower than expected, although bad weather added more costs to its Aberdeen bypass project. CEO Peter Truscott insisted it’s on track to deliver further profitable growth over the full year, with profits, before tax and exceptional items, set to hit analyst expectations of £138m-£146m.

Galliford Try currently trades at a bargain 6.5 times earnings, although City analysts predict a 2% drop in earnings per share (EPS) in the year to 30 June 2019. The current yield is covered twice but is forecast to slip to 7.3%, while operating margins are thin at 2.13%, and return on capital employed (ROCE) is just 0.06%. This is still a tempting income play, for those happy with risk. Foolish colleague Roland Head is a buyer.

Stage is set

The second most generous yielder on the FTSE 250 is Stagecoach Group (LSE: SGC), currently paying 8.78%. The £780m company, which runs trains, buses, trams and express coaches in the UK, US and Canada, has a dismal share price performance, with the stock trading 66% lower than three years ago.

It’s valued at just 5.6 times earnings, but operating margins of just 0.54% and ROCE of 0.07% suggest a business that’s labouring in the slow lane. Full-year profits took a one-off hit from the Beast from the East in the UK, and similarly wild weather in North America, although like-for-like revenues did grow.

Slow coach

Stagecoach and Virgin Group have jointly lost more than £200m on their East Coast franchise, which operates intercity services between London Kings Cross and Scotland, and has since been nationalised. Now could be a time for brave investors to take advantage of negative sentiment, while also crossing their fingers that the East will not unleash another Beast next year.

Be warned, City analysts reckon EPS could fall 18% in the year to 30 April, then 11% and 9% in the two years that follow. The worry is this could imperil the yield, which currently has cover of 1.6. A cut of say, one third would still leave a pretty handy cheap income play, but Stagecoach would not be my first stop.

The post Are these 2 FTSE 250 8%+ dividend stocks too cheap to be true? appeared first on The Motley Fool UK.

More reading

• 13,000 more reasons why I’m avoiding IAG shares!
• This FTSE 250 stock fell by over 3% after solid earnings. Should investors consider buying it?
• £10,007 invested in Aston Martin shares on 1 April is now worth…
• Why NOW could be the best time to find stocks to buy!
• £1,000 buys 297 shares in this beaten-down UK housebuilder with a £700m opportunity

harveyj 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.