Two 7%+ yields I wouldn't touch with a bargepole

Today I'm looking at two unusual turnaround situations, including one from my own portfolio. I believe that shares in both companies could deliver big gains from current levels, but there's also a significant risk of further problems.

Heading for trouble?

Shares of specialist logistics group Connect Group (LSE: CNCT) were down by 6% at 56p at the time of writing this morning, taking their total decline over the last year to 55%.

The company operates parcel group Tuffnells, while its Smiths News business has a 55% share of the UK newspaper distribution market. But Smiths is struggling with declining newspaper volumes, while Tuffnells generated a loss during the first half of the year.

This 16% yield should be cut

Connect's revenue fell by 3.4% to £766.5m during the period, while operating profit dropped 37% to £12.4m. Earnings per share for the half year to 28 February fell by 42% to 3.1p.

This was just enough to cover the interim dividend, which was held unchanged at 3.1p. If this payout is maintained at the end of the year, then the stock would offer a forecast yield of 16% at current levels. But in my view this is very unlikely. I think the final dividend is almost certain to be cut, probably by at least 50%.

Why I'd sell

This could be a great turnaround buy. Even if the dividend is reduced by 75% it would still be attractive at 4%. And the current forecast P/E of less than 5 leaves plenty of room for a re-rating.

However, I'm leaning towards selling my shares. I'm concerned that net debt of £83m could become a problem if profits fall further. And I also think that this investment probably falls into the 'too hard' category. I just don't have the insight needed to understand what the firm can realistically achieve with its assets. So I'd rate the shares as a sell.

Making good progress?

Another company whose outlook I find hard to understand is newspaper publisher Trinity Mirror (LSE: TNI).

This stock trades on an even more extreme valuation than Connect Group. Adjusted earnings are expected to remain stable this year, but Trinity Mirror has a forecast P/E of 2.3 and a prospective yield of 7.1%.

Interestingly, this dividend does appear to be well supported by earnings, with a dividend cover ratio of 5.9 times. However, there's a reason for this, as I'll explain.

So what's the problem?

The recent acquisition of Express Newspapers boosted investors' hopes that this business may be able to return to growth.

But from a financial point of view, the big risk for shareholders is the pension scheme. At the end of 2017, Trinity Mirror had pension liabilities of about £1.9bn, and a pension deficit of £377m.

To try and reduce this deficit, Trinity Mirror has agreed to pay £43.8m each year into the pension for 10 years from 2018. Based on the group's 2017 pre-tax profit of £122m, that's around one third of annual profits.

This is why the dividend is so low, compared to earnings. Most available cash is being paid into the pension.

Chief executive Simon Fox is managing a difficult balancing act in order to keep everyone happy. But with newspaper sales continuing to fall, I've no idea whether he'll be able to keep it up. That's why I'm staying away from this special situation.

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Roland Head owns shares of Connect 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.