Dividend yields of nearly 10% are a rare phenomenon. Usually, if a yield reaches this level, it is a signal from the market that the payout is unsustainable. And generally, it is only a matter of time before the dividend is slashed after rising into the high-single-digits.
However, today I’m looking at one FTSE 250 dividend stock with a dividend yield of 9.5% that seems to be entirely sustainable.
Hated by the market
N Brown (LSE: BWNG) has to be one of the market’s most hated stocks right now. Over the past 12 months, shares in the company have lost more than 50% as investors have run for the hills. But despite investors’ negative view of the enterprise, fundamentally, the business appears sound.
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As my colleague Royston Wild pointed out at the end of July, N Brown’s sales expanded 0.4% for the three months to the end of May. This growth is hardly show-stopping, but the enterprise is still growing. Internet sales of its so-called Powerbrands like Jacamo and JD Williams rose 9% in the last quarter.
I’m not the only one who believes that N Brown’s underlying business appears sound. After the May trading update, City analysts went back to revise their growth forecasts for the company. Before the update, earnings were expected to remain flat in 2018, now, however, growth of around 6% is predicted. A similar expansion is pencilled in for 2020.
This growth should support the firm’s dividend. Based on current forecasts, the 14.3p per share payout will be covered 1.6x by earnings per share (EPS). In my view, this level of cover is more than enough to maintain the payout, with room to spare.
What’s more, after recent declines, N Brown is trading at a forward P/E of just 6.5. I reckon the market is being too pessimistic here and N Brown is too cheap at current levels. Indeed, if trading improves, the shares could double from current levels.
Costly investment
One FTSE 250 company that I am less enamoured by is WH Smith (LSE: SMWH). It has been on a staggering run of growth over the past decade with EPS growing at an average annual rate of 13%.
The problem is, today it looks very expensive. The stock currently trades at a forward earnings multiple of 17.5, a multiple of that in my view is more suited to a fast-growing tech business rather than a retailer. To be able to justify a P/E of 17.5, you have to believe that it can continue to grow earnings at a double-digit rate for the next few years. City analysts don’t think this is likely. The City is predicting EPS growth of just 5% for 2018 and 7% for 2019.
I’m concerned that these figures are hiding a more worrying trend. Growth is stagnating despite the company’s aggressive overseas expansion plan. WH Smith opened eight new stores in Madrid airport’s Terminal 4 in mid-August and six stores are planned in Rio de Janeiro.
For a company that is continually breaking into new international markets, I would expect faster bottom-line growth. The figures indicate that growth at home may not be as strong as management would like.
With this being the case, I reckon it is sensible to avoid the shares for the time being as the high valuation does not leave much room for disappointment.
