High-yielding dividend stocks are the tempting, low-hanging fruit of the investment world. The worry is they may prove rotten to the core. The following two FTSE 250 companies both yield more than 8%, so should you take a bite?
It's good to...
TalkTalk Telecom Group(LSE: TALK) currently yields exactly 8%. Yesterday it was yielding 8.33%, but Friday's 5% share price surge has trimmed that slightly. The surge was triggered by a positive note from HSBC, which upgraded its investment rating from hold to buy and hiked its price target from 175p to 250p. With the stock currently trading at 198p, that would suggest a potential 26% upside, if HSBC is proved correct.
This will only go a small way to reversing the disastrous performance of the past two years, which has seen the share price hammered by multiple cyber attacks, which cost the group £42m and contributed to the £18m fall in profits. TalkTalk also suffered reputational damage, when it emerged that the industrial scale fraud operation stemmed from Indian IT service firm Wipro, which it had contracted in 2011 to provide some of its call centre work.
Quite a bundle
Yet recent Q3 results were promising, with re-contracting rates in the third quarter stronger than expected, low churn, and a strong legacy business of loyal customers. The multi-services entertainment group is in recovery mode, its share price up 15% in three months, as it builds on its niche position in the UK telecoms market and looks to take advantage of greater demand for data and product generation, both for personal and business customers.
It is in a five-way stand-off, battling to hold its own against big boys such as BT, Sky, Virgin Media and Vodafone, but has held its own so far. Forecast earnings per share (EPS) growth of 55%, 11% and 12% over three years should drive down today's pricey valuation of 22.5 times earnings to a far more acceptable 12 times, although the yield is still expected to stay high at 7.1%. This could prove a good call.
Construction business Carillion(LSE: CLLN) looks an even more tempting income play with its current yield of a mighty 8.66%. But as we know, you have to approach such a heady yield with caution. This reflects a tough decade for the company, whose share price topped out at around 435p just before the financial crisis to just 214p today, a drop of almost exactly half. Its struggles continue, with the share price down 25% over the last 12 months.
Carillion has been hit by falling profits from its overseas construction work and continuing low margins on the outsourcing side of its operation. Its 2016 results show that despite 14% mostly organic growth in revenues, profit before taxation fell 5% to £146.7m and basic earnings per share slumped 6% to 28.9p. The dividend was increased by just 1%.
Its high-quality order book plus probable orders dipped from £17.4bn to £16bn over the year to 31 December 2016. However, that remains pretty healthy, as is dividend cover of 1.9. A forecast drop in EPS of 4% this year disappoints, even if it is due to climb a modest 3% in 2018. This company clearly has problems, but just look at that income.
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Harvey Jones has no position in any 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.