Capita plc isn't the only cheap stock yielding more than 6%

Until relatively recently, Capita(LSE: CPI) was widely considered a 'quality' company. Many investors were willing to pay a premium price-to-earnings (P/E) ratio -- in the high teens -- and accept a sub-3% dividend yield.

However, the shares have fallen from an all-time high of over 1,300p just a couple of years ago to nearer 500p today. The forward P/E is 10.5 and the dividend yield is 6.1%. Earnings for the current year are set to be 30% below their 2015 peak but the 60% fall in the share price shows the devastating impact when an earnings drop is combined with a de-rating from a high P/E.

Turnaround

One or two dissenting analysts had questioned the scores of acquisitions Capita was making, its revenue recognition policies, the increasing opaqueness of the group, and whether its balance sheet was a lot thinner than it appeared on the surface. These concerns proved to be not far off the mark.

Capita has bitten the bullet and is in the midst of a restructuring. It's revisited its revenue recognition policies and elected for early adoption of a new, more conservative accounting standard. It's cutting costs and is simplifying and refocusing the business, including by disposals, which will also improve the balance sheet.

While it's been a disaster for shareholders who bought at any point in the last 10 years, it's been rather more successful from its customers' perspective. And it retains strong and embedded long-term relationships with them. With the trend towards outsourcing providing a long-term tailwind and the major overhaul of the company, I believe it's well positioned for the future under its new chief executive.

Although not guaranteed, it's looking like Capita may be able to maintain its dividend and I rate the stock as an attractive buy for the long term.

Strong cash generation

In contrast to Capita, Trinity Mirror(LSE: TNI) has been lowly rated by the market for years, persistently trading on a low-to-mid single-digit P/E. On the face of it, with the newspaper industry in structural decline and Trinity having a hefty pension deficit, it appears a signally unpromising investment.

However, investors who bought-in at the lows of around 20p, immediately after it suspended its dividend in 2008, have been handsomely rewarded. It's taken a while but since the company resumed payouts in 2014, such investors have already received dividends of 15.85p a share. And within the next 12 months, should have recouped their investment in dividends alone. Meanwhile, the value of their shares has quadrupled.

Trinity has strong property assets, its pension deficit should start to reverse as interest rates rise and it's a highly cash-generative business. It trades on a forward P/E of just 2.5 and with the board having a progressive dividend policy to increase the payout by "at least 5% per annum," the forward yield is a stunning 7.2%. It's also generating enough cash for share buybacks and investing in the business in addition to paying dividends. As such, I also rate Trinity a 'buy'.

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G A Chester 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.

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