One 8% yield I'd sell to buy this dividend growth stock

The Motley Fool

Moss Bros Group(LSE: MOSB) has long been considered one of the market's top growth and income stocks. That is until a few months ago when the company issued a dire trading update following a disappointing Christmas.

Management blamed the "the more challenging trading environment," as well as "stock shortages caused by the consolidation of key suppliers," for the problems. And as a result, the business slashed the full-year dividend for the period ending January to 1.97p per share from 3.98p a year earlier. This means the total payout for 2017 fell to 4p per share, a yield of 8.7% based on current prices.

However, it looks as if things are improving for the group as the year goes on. In a trading update ahead of its annual general meeting, the company announced today that like-for-like sales were down more than 5% in the 15 weeks to mid-May. Total sales declined 2.4%.

This might not be a showstopping performance, but it is a marked improvement from the March profit warning when like-for-like sales declined 6.5%. CEO Brian Brick noted in the update that the company has benefitted from the resolution of supplier issues and the "anticipated recovery in stock availability is on track and the stock position much improved from the early weeks of the current financial year." And the CEO is also highly confident that the group will have the right levels of stock to "maximise our share of our customers' spend" as it heads into the busiest period of the year for formalwear.

Problems persist

Despite the improvement in trading, I'm not buying Moss Bros's recovery. While the company has carved out a nice niche for itself in the suit and formalwear market, the firm's recent troubles show that despite its edge, the business is not immune to broader market headwinds.

Forecasts from the City support this conclusion. Analysts are predicting a 69% decline in earnings per share for 2018. A recovery is anticipated in 2019, but even though analysts have forecast earnings growth of 63%, estimated earnings of 2.9p per share still leave the group trading at a forward P/E of 16.5, a premium multiple for a struggling retailer in my opinion.

International expansion

In my view, Superdry(LSE: SDRY) could be a much better income and growth investment. For a start, shares in the fashion business are much cheaper. Based on current City forecasts, shares in the company are trading at a forward P/E of 12.2 falling to 10.7 for 2019.

Moreover, analysts have pencilled in double-digit dividend growth of 15% per annum for the next two years. This means that while the stock only yields 2.6% today, the yield is set to hit 3.2% by 2019 based on current prices.

That being said, Superdry does have some problems of its own. The stock was marked down by 15% in a single day last week when it revealed full-year gross margins have declined by approximately 200bps year-on-year.

The good news is, despite the contracting margins, management believes the company is on track to report another year of double-digit earnings growth for the year to 30 April thanks to revenue growth of 16% for the period. The group is benefiting from its international diversification as well as global brand recognition, two traits I believe will help the enterprise continue to outperform the rest of the retail industry.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Superdry. 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.