Is McColl’s Retail Group plc’s 5.8% yield set to be damaged by Brexit?

Should you avoid McColl’s Retail Group plc (LON: MCLS) due to Brexit fears?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The outlook for the UK retail sector is highly uncertain. Brexit has already caused a depreciation in the value of sterling, which is likely to make inflation rise. This could hurt consumer confidence if wage growth fails to match inflation, which in turn may cause spending levels to come under pressure over the medium term. In such a scenario, should investors avoid convenience store operator McColl’s (LSE: MCLS), even though it has a whopping 5.8% yield?

Today’s full-year trading update from McColl’s shows that it’s making good progress in a challenging market. Although revenue increased by 1.9% for the full year, on a like-for-like (LFL) basis it fell by the same amount. However, recently acquired and converted stores fared much better, recording LFL sales growth of 0.8%. This shows that if the company can roll out its store conversion programme and successfully integrate the 298 stores acquired from the Co-op, its top-line performance could improve.

In fact, in the new financial year the convenience store operator is expected to record a rise in earnings of 18%. This improved performance hasn’t yet been factored-in to the company’s valuation, since it has a price-to-earnings growth (PEG) ratio of just 0.6. As such, it has a wide margin of safety that could mean that even if Brexit causes a difficult period for the retail sector, McColl’s could significantly outperform its peers.

Should you invest £1,000 in Frasers Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Frasers Group Plc made the list?

See the 6 stocks

Furthermore, a yield of 5.8% is well-covered by profit. In the current year earnings are expected to cover shareholder payouts 1.7 times, which indicates that there’s room for dividend growth even if profit growth stalls. As such, it seems unlikely that McColl’s dividend will come under threat by Brexit, although its growth rate may be hurt somewhat over the medium term. Still, with such a high yield it remains a top notch income play.

Growth opportunity?

One retailer that lacks appeal at the present time is Sports Direct (LSE: SPS). Although its value proposition may prove popular if Brexit causes a squeeze on disposable incomes, Sports Direct continues to offer lacklustre growth forecasts. In the current year, its bottom line is due to fall by 45%. This could severely damage investor sentiment and send the company’s shares downwards.

While Sports Direct is expected to return to growth next year, its PEG ratio of two indicates that its improved outlook is already adequately priced-in. It also lacks a dividend, so it’s difficult to see how its share price will be positively catalysed in future.

As such, at a time when the retail sector is enduring a tough period that could worsen due to Brexit, it seems logical to buy McColl’s and avoid Sports Direct. The former’s dividend outlook is highly positive, although it’s as much a growth opportunity as an income one as its acquisition programme continues.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Road 2025 to 2032 new year direction concept
Investing Articles

The Ocado share price is up 48% in a month! Is this the start of a stellar recovery?

Harvey Jones says the Ocado share price is the ultimate binary play. The FTSE 250 stock could fly, or it…

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

Growth, buybacks and dividends galore – are NatWest shares the ultimate no-brainer buy?

NatWest shares are flying again, as we saw in its expectation-thrashing results. Harvey Jones looks at whether the FTSE 100…

Read more »

Female Tesco employee holding produce crate
Investing Articles

Is a UK stock market correction coming?

Our writer’s increasingly concerned about the apparent disconnect between the performance of the UK stock market and that of the…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

The Rolls-Royce share price has soared 66% already this year! Can it really keep going?

Even after a stunning few years, the Rolls-Royce share price has soared by two-thirds already this year. Our writer revisits…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Spare £5k? Here’s how long it would take to generate a second income of £5k every year!

Christopher Ruane explains the maths behind building a second income from dividend shares, as well as some of the opportunities…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

As the FTSE 100 hits an all-time high, is it too late to get in on the boom?

The FTSE 100 index of leading British shares hit a new all-time high in the past week. Our writer explains…

Read more »

Close-up of British bank notes
Investing Articles

3 shares to consider for long-term passive income

Christopher Ruane thinks investors on the hunt for passive income streams should consider this diverse trio of dividend-paying shares.

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

Here are the latest dividend yield forecasts for Legal & General, Aviva, and M&G shares

If someone’s looking for high dividend yields on the London Stock Exchange, these three Footsie financial stocks are definitely worth…

Read more »