At the beginning of March, shares in Greencore(LSE: GNC) the world's largest sandwich maker by volume, slumped by more than a third in a single day after the company issued an unexpected profit warning and announced the restructuring of its recently acquired US business.
Since this announcement, the shares have regained some composure, and today, the stock has jumped nearly 10% after the interim management statement was published.
However, despite the recovery, I'd still dump shares in Greencore without delay.
Time to sell?
The last time I covered it (before the firm's March profit warning), I concluded that, based on City growth estimates at the time, the shares appeared to be undervalued. Now I'm not so sure.
Today, the company confirmed its forecast to grow earnings per share for the year (the City is forecasting growth of 18%), even though restructuring costs have taken a bite out of profit. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 9.4% in the first half, and management believes the troublesome US business is now much better positioned to deliver an improved performance in the second half.
The group expects strong organic growth for the rest of fiscal 2018 and management is so confident in the outlook it has increased the interim dividend by 4.8%.
But I'm not convinced. You see, while Greencore's top line might be growing, the group's bottom line, or more specifically cash conversion, leaves much to be desired. Adjusted EBITDA might have increased 9.4% to £87m for the first half, but cash generated from operations for the period was only £27m. Free cash flow was negative after deducting spending on capital projects. Based on these figures, it looks as if the company's dividend distribution to investors was with debt, which in my view is a big red flag for dividend investors.
With this being the case, I'd dump this FTSE 250 dividend stock without delay.
Another dividend stock I'd avoid is McCarthy & Stone(LSE: MCS). At first glance, this retirement home builder looks undervalued. The shares trade at a P/E ratio of just 7.8 and support a dividend yield of 4.4%. However, it seems as if the stock deserves this valuation as the company is struggling to grow.
In the six months to February, the business recorded a 52% decline in pre-tax profits to £11.5m and revenues only increased by 1%, despite average selling prices rising by 15%. There is also uncertainty surrounding McCarthy's income stream from ground rents, a valuable source of income for the group. Around 4% of revenues came from related sales in 2016, and the total is expected to rise to £33m or approximately 7% of revenues for 2018.
And while McCarthy is struggling, the rest of the home building industry is powering ahead, which is not a good situation for the business. In fact, I believe that McCarthy is one of the weakest builders in the sector, and if you are looking for income and growth, one of its peers, such as Taylor Wimpey might be a better buy.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Greencore. 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.