Why I'd sell this FTSE 100 shocker to buy this dividend star

Against a toughening trading backdrop Marks & Spencer Group(LSE: MKS) has seen its share price decline 25% from the 2017 peaks above 395p per share printed back in May. And the company's latest trading update has fed expectations that even more trouble could be around the corner.

Transforming its clothing lines has long been a problem amid charges that its ranges are both old-fashioned and expensive, particularly when lined up against what's found over at the likes of Next and H&M.

And Marks & Spencer's November market update showed that these accusations remain very much alive and well. While revenues have improved over the most recent quarter, the company still endured a 0.7% decline in like-for-like sales for the six months to September.

Food failing

To add to the its headaches, the allure of its previously-robust Food arm is also declining slightly. Like-for-like sales here dropped 0.1% during April-September, its performance again lagging that of the wider grocery industry. M&S noted noted the detrimental impact of the online home delivery and convenience segments on sales, and the price pressures that are driving customers into the arms of the discounters.

The FTSE 100 firm plans to slow the rollout of its Simply Food outlets, and to change its product proposition with a greater focus on value. This is likely to put further stress on already-pressured margins and higher costs and increased promotions in the first half have caused M&S to say Food margins will fall between 75 and 125 basis points in the full year.

A bleak outlook

Falling demand for its edible items is the last thing Marks & Spencer needed given its ongoing failure to attract fashion shoppers.

Chief executive Steve Rowe recently commented: "The business still has many structural issues to tackle as we embark on the next five years of our transformation" and he is not kidding, the challenging retail environment making it even harder to achieve its much-awaited turnaround.

The City is expecting earnings to drop 9% in the year to March 2018, and the likelihood of any bounce-back thereafter is built on pretty sandy foundations, in my opinion. I reckon investors should give the company a wide berth despite its low paper valuation, a forward P/E ratio of 10.8 times.

Brown sugar

Marks and Sparks' poor profits outlook, expensive transformation programme and colossal debt pile (net debt stood at £2bn as of September) leave dividends in danger of falling short of forecasts. Analysts are expecting an 18.4p per share reward, creating a jumbo 6.2% yield.

Instead, I believe those seeking a cut-price dividend star should take a look at N Brown Group (LSE: BWNG). The FTSE 250 retailer is expected to deliver a 14.22p per share reward, resulting in a monster 5.2% yield.

Although the retailer is not immune to the broader pressures washing over the UK high street, its focus on the 'plus size' niche segment and under-served 50-plus market puts it in a much stronger position than M&S to ride out the storm and deliver long-term earnings growth. Indeed, sales at its Jacamo and Simply Be fascias increased 6.7% and 21% respectively during March-August.

The City is expecting earnings to slip 3% in the 12 months to February, but I am expecting earnings to flip higher thereafter, helped by its increased focus on online retailing. I reckon a forward P/E ratio of 12.4 times makes N Brown worth a serious look today.

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Royston Wild 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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