Why I would dump this FTSE 250 stock to buy its high-yielding competitor

The Motley Fool
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Mid-cap pub chain JD Wetherspoon(LSE: JDW) is down 1% this morning after warning that first-half profit before tax is expected to be lower than last year, although the damage is limited as full-year expectations remain unchanged.

Heavier Wether

The FTSE 250-listed group has been a fast grower but may be slowing. It’s up 96% measured over three years, but down 5% over the last 12 turbulent months.

Today’s update, covering the six months to 27 January, showed like-for-like sales increasing by a robust 6.3%, and total sales by 7.2%. Second-quarter growth was slightly faster, with comparative sales rising 7.2% and total sales up 8.3%.

Brexit bonus?

Chairman Tim Martin hailed “strong” sales growth with the proviso that: Costs, as previously indicated, are considerably higher than the previous year, especially labour, which has increased by about £30m in the period.” Although JD Wetherspoon was pressured into raising wages for its workers, interest, utilities, repairs and depreciation have also got pricier.

Martin is a renowned Brexiteer and, again, a chunk of this update focuses on the impact of leaving the EU, arguing that it will cut business costs by reducing tariffs on non-EU imports. He also said the £1.25bn group remains in a sound financial position,” although net debt at the end of this financial year will be around £10m higher.

Credit where it’s due

JD Wetherspoon has agreed a new five-year revolving credit facility of £875m (up from £820m) on attractive financial terms. As Kevin Godbold points out, shareholders have been rewarded with multi-bagging gains since it came to market. The stock is up 11% over the last month to trade at 15.8 times forecast earnings. Sadly, it’s no bargain.

The stock yields just 1%, with cover of 6.2. City analysts, predicting that earnings will fall this year and next, leaving me a bit underwhelmed even if Brexit does bring us cheaper Cambodian rice imports, as Martin hopes.

Easier being Greene

The pub trade is tough right now but FTSE 250 hospitality group Greene King(LSE: GNK) has greater diversification. It owns more than 3,000 pubs, restaurants, and hotels across the UK, with brands including Chef & Brewer, Farmhouse Inns, Hungry Horse, Wacky Warehouse and Loch Fyne Seafood & Grill. However, food chains are also under pressure generally.

Its stock trades 27% lower than three years ago, but this hides a tasty recent comeback, up 25% in three months. It was heading in the right direction even before the market recovery, as World Cup and warm summer momentum continued into autumn.

Cash is King

Profits have been under pressure but Greene King remains highly cash generative, meeting its debt repayment requirements, investing in pubs, and paying a sustainable dividend out of operating free cashflow. The £1.86bn group trades at a knockdown valuation of 9.5 times forecast earnings. Earnings are expected to be flat this year, then rise 1% and 6%, while the tasty forecast yield of 5.5% looks safe with cover of 1.9.

As consumer incomes finally outpace inflation, things could look brighter for the pub sector. And Edward Sheldon reckons its shares could quickly pay for themselves by giving you 25% off food and drink for a year. I’ll drink to that.

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harveyj has no position in any of the shares mentioned. 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.