Dividend yields of more than 6% often require serious health warnings. But I think I’ve found a 7.4% yield that could be sustainable, and might even rise over the next few years.
I’ll return to this tempting prospect in a moment, but first I want to take a brief look at a company whose latest trading figures suggest to me that it could be a good income buy.
I’d bet on this
Bookmaker William Hill (LSE: WMH) is a well known name on the high street. But many investors don’t realise that this company generates about half of its operating profits either online or abroad, in the USA.
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Today’s first-quarter trading statement suggests that this shift is continuing. UK online revenue rose by 12% during the quarter, while high street revenue fell by 4%. In the US, net revenue rose by 45%.
Admittedly, these impressive results were given a big boost by favourable sporting results. Sports wagering levels in the UK actually fell slightly, but the bookmaker’s win margin was higher than usual, boosting revenue. Management expects this to normalise over time, so today’s figures are unlikely to herald a surge in profits.
Cheap enough to buy?
I’m not too concerned by the prospect of flat profits. With the stock trading on 11 times forecast earnings, it seems priced for bad news. But with a decision due soon on the maximum stake for fixed-odds betting machines, the outlook could soon become more certain.
In the meantime, shareholders are being paid to wait with a well-supported dividend yield of 4.8%. I’d rate the shares as a buy for income at current levels.
Here’s my 7.4% yielder
If you’re looking for a higher yield, then “specialist fit” fashion retailer N Brown Group (LSE: BWNG) could offer a rare chance to lock in a 7%+ dividend yield. The group’s shares have fallen by about 20% since I last considered the stock. I’m starting to think this decline may have gone too far.
The group mainly operates online, with brands such as Jacamo, Simply Be and Figleaves. The last few years have been tough. Falling profits have caused the shares to lose more than 65% of their value from their 2014 peak.
However, there are now signs that this process has bottomed out and that the outlook may be improving. Sales rose by 3.9% to £922.2m last year, while adjusted pre-tax profit was 1.3% higher, at £81.6m.
Although the group booked exceptional costs of £56.9m last year, these mostly related to historic financial issues. The cash impact of these is expected to peak in the current year, after which the situation should improve.
A turnaround buy?
It’s worth mentioning that this company makes quite a lot of money by selling to customers on credit. In 2017/18, 29% of revenue came from financial services. I estimate the contribution to profit may have been greater than this.
This business model can be very profitable, as long as bad debt and regulatory risks are managed carefully.
Broker consensus forecasts suggest that the group’s adjusted earnings should be largely flat this year, at 22.9p per share. This should provide adequate cover for the dividend of 14.3p per share, supporting the 7.4% yield.
At the last-seen price of 193p, N Brown trades on just 8.4 times forecast earnings. I believe the shares could be a buy at this level.
