Stagecoach's trading statement is in line with expectations and the company isn't changing its guidance for the year to April 2017. However, it concedes that the macroeconomic outlook is now less certain than it was. Therefore, there's a higher than usual degree of forecasting uncertainty.
In terms of its performance in the year thus far, Stagecoach's Virgin Rail Group and UK Rail have recorded like-for-like (LFL) revenue growth of 4.7% and 1.7% respectively. However, this is slower growth than in previous years and this is an industry-wide problem rather than a company-specific issue. Stagecoach faces the negative effects of weakening consumer and business confidence, increased terrorism concerns, slower UK GDP growth and reduced growth in real earnings.
However, the performance of the rail divisions was superior to the performance of its UK Bus and North America divisions. Its regional UK Bus operation saw LFL revenue decline by 1.9%, while in London buses recorded a fall of 0.9%. This was partly due to lower fuel prices as well as reduced demand in parts of the UK for bus services. In London, Stagecoach was hurt by a small net reduction in contracts with Transport for London.
Meanwhile, in North America sustained lower fuel prices and subsequent heightened car and air competition led to a decline in LFL revenue of 3.3%. This is disappointing and shows that Stagecoach's North American unit is a drag on its overall operating performance.
Looking ahead, the challenges Stagecoach is experiencing are set to cause a fall in earnings of 9% this year and 5% next. However, the company is still forecast to increase its dividends by 4.3% per annum during the two-year period. This puts Stagecoach on a forward yield of 6%. And while its financial performance may deteriorate further, dividends are due to be covered 1.9 times by profit next year. This indicates that they're highly sustainable.
Go for stability?
Of course, Stagecoach is a relatively risky buy for income seekers. Its financial performance is deteriorating and it may therefore be prudent to buy a more robust dividend payer such as National Grid. It may yield less than Stagecoach at 4.2% versus 6% and dividends are covered 1.5 times versus 1.9 times for Stagecoach. However, National Grid has a lower risk profile because it operates within a far more stable and robust arena.
The outlook for the UK and global economies is highly uncertain at the moment. National Grid is viewed as a relatively safe stock to own during such times and so demand for its shares could increase in the coming months. This could help it to outperform Stagecoach, which may make up for the lower income return over the near term. When allied to its more certain dividend payments over the long run, this makes National Grid the better income buy at the present time.
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Peter Stephens owns shares of National Grid. The Motley Fool UK has recommended Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.