Why I'd sell this share despite its 7.5% yield

A mixed set of full-year financials on Thursday has affirmed my cautious view on big-yielding Gattaca(LSE: GATC), even if the market has been more forgiving than last time the firm released trading numbers. The stock was 1% lower at pixel time.

The specialist recruiter advised that revenues rose 4% in the 12 months to July, to £642.4m, while net fee income (NFI) advanced 2% to £74.7m. But this could not push earnings higher at the business -- indeed, pre-tax profit ducked by a painful 24% year-on-year to £11.5m.

Gattaca advised that NFI at its UK Engineering operations reversed 3% in the period while at its UK Technology arm these fell 6%. And thanks to contract reductions in South Africa, NFI for its International division dropped 4% year-on-year.

Trouble at home

The Fareham business said, however, that it has seen conditions improve more recently at UK Engineering and International. At its core UK Engineering arm it said that "exit rates for fiscal 2017 indicated that the decline in those markets was abating" with quarter four NFI down just 1%.

The City is expecting earnings to bounce 55% in fiscal 2018 as recent investments pay off, and this leaves the business trading on an ultra-cheap forward P/E multiple of 8.4 times. A projected 23p per share dividend creates a market-smashing yield of 7.5%.

But any chances of a solid recovery from the current year remain less than assured, in my opinion, given that tough trading conditions in the UK look set to remain. Indeed, Gattaca said that its UK Technology arm "continued to face challenges in quarter four, especially Telecoms where gains in new markets such as converging telecoms were not sufficient to offset lower demand for our network infrastructure market."

Given the possibility of sustained economic and political strife in the UK (from where Gattaca sources 80% of group NFI), the recruiter carries too much risk for me to be happy with, even at current prices.

Bargain builder

I would be much happier to plough my hard-earned cash into Bellway (LSE: BWY) right now, and particularly given its very-compelling valuations.

I myself own shares in Britain's housebuilders, holdings in Barratt Developments and Taylor Wimpey forming a cornerstone of my own investment portfolio. I always buy on the basis of holding a share for a minimum of five years and, with Britain's painful housing shortage still not being properly addressed by government, I am convinced the likes of Bellway should remain formidable earnings generators for some time yet.

Against this backcloth, the City expects Bellway to print earnings expansion of 12% in the year to July 2018, a figure that creates a bargain forward P/E ratio of 8.3 times as well as a mega-low sub-1 PEG reading of 0.7.

And the FTSE 250 firm's bright profits outlook and strong cash generation (it had £16m in cash on its balance sheet and no debt as of July) should keep driving dividends higher, too. Last year's 122p per share reward is expected to step to 135.7p in fiscal 2018, resulting in a chunky yield of 3.8%.

I reckon Bellway is in much better shape than Gattaca to deliver sustained profits and dividend growth in the years ahead.

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Royston Wild owns shares in Barratt Developments and Taylor Wimpey. 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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