Why I'd buy this bargain dividend stock instead of Tesco plc


According to recent reports, sales of new cars in the UK have been falling over the past few months, but there's little sign of the pain in this morning's interim results from Lookers(LSE: LOOK).

SEE ALSO: Why I'd buy Lloyds Banking Group plc over these two banks

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Good results

In the first half of the year, the UK-focused motor retail and after-sales services firm scored a revenue increase of 5% compared to a year ago and earnings per share from continuing operations lifted a healthy-looking 15%. The directors used some of the incoming cash flow to reduce net debt by more than 16% to £44.6m, and some to raise the interim dividend by 10%.

I find the dividend decision to be interesting because it speaks volumes about how the directors perceive the immediate prospects for the business. It seems unlikely that they would raise the dividend and commit the firm to the further expense if they believed the immediate outlook for business to be poor.

Chief Executive Andy Bruce adds weight to the theory, saying in the report: "Our order book for new cars for the important month of September is continuing to build in line with our expectations and the new car market for this year is still forecast to be at a historically high level."

A reassuring outlook

The firm's outlook statement clarifies further, explaining that the company expects the new car market to reduce slightly while remaining historically high. On top of that, Lookers is seeing further increases in used car volumes and is growing its share of that market. I reckon used car sales could help balance any further easing of new car sales if economic hardship bites any deeper into consumers' incomes.

I can't deny that the firm operates in a cyclical sector, which probably accounts for recent share-price weakness. But at today's 109p, the forward dividend yield runs around 3.7% with City analysts following the firm expecting forward earnings to cover the payout almost four times. Over the past five years, the dividend has grown 67%. I think the value here looks compelling, despite cyclical uncertainties.

Long-term challenges

I'd rather take my chances with Lookers than with troubled supermarket giant Tesco (LSE: TSCO). At first glance, the numbers look quite good. Today's 179p share price throws out a forward dividend yield of just over 2.9% for 2018 with City analysts forecasting cover from forward earnings around 2.4 times. However, after a near three-year absence, dividend payments are anticipated to restart during the current trading year - the firm's dividend record leaves a lot to be desired.

City analysts following the firm anticipate resurging earnings this year and next year, but I think squeezing earnings out of the business can only go so far, and the longer-term prospects of the firm will depend on growth in revenues. And that's the problem. Last year's annual report showed revenues rising just 1% or so. Tesco seems to be struggling to maintain UK grocery market share against the onslaught of fast-growing competitors such as Aldi and Lidl. I see Tesco as a colossus in long-term decline so will continue to avoid the firm's shares.

The best work you can do in investing

I reckon being selective about investments can help protect the downside risk in a portfolio.

Guarding against losses is arguably the best work you can do in investing, and we hear it over and over from successful investors such as Mark Minervini, Peter Lynch and Warren Buffett.

The Motley Fool analysts have also produced a report, which features a collection of wisdom from those who have got dirty in the investing trenches. It's called Worst Mistakes Investors Make. I recommend you get your copy now. It's free. Click here.

Kevin Godbold 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.

Alternative investments
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Alternative investments

Fine wine is one of the best-performing asset classes of the last 20 years, and prices are still going up as demand from China hits new highs - particularly at the top end of the red wine market.

However, there are no guarantees that this trend will continue, and the experts recommend that nobody goes anywhere near wine as an investment unless they can afford to lose a substantial proportion of their money - or if they would be happy drinking their losses.

They highlight that in 2008 and 2011, the market saw some serious slips - in fact in 2011 it fell 30% - so it’s important to be alive to the risks

We’re used to the idea of the value of cars falling over time, but desirable classic cars can actually gain in value. The most desirable handful of cars have seen their value double in the past four years, while even the kinds of classics that most people can afford are increasing in value by anything up to 20% a year.

However, as with all of these alternative investments, this isn’t guaranteed to continue in the future, so you should never invest what you cannot afford to lose.

Buyers also need to bear in mind that unless they are keeping the car in mint condition in a garage, they need to pay to keep it on the road - which can easily cost £1,000 a year - more if something big goes wrong.

Some owners think of this as the price they pay for the hobby of owning the car - quite aside from the investment - but if you consider the two together, it’s easy to see how even if the car itself increases in value, you’ll end up paying out more than you gain.

According to Knight Frank, antique furniture has had the worst run of all of the luxury investments. Prices fell 8% last year, and are down 22% in five years and 24% in ten.

This is partly because older antique furniture is falling out of fashion. As a result, more fashionable early and mid 20th century pieces have done better, and are up 29% in ten years.

Passing fashions make this a particularly volatile investment, so in this case more than any other, investors should buy things because they want to see them in their home - with the handy side-effect of a potential increase in value if they buy something iconic and unusual.

And while they should buy the best they can afford, they need to ensure they do not spend more than they can lose - or choose to keep in the lounge if the bottom falls out of the market.

Investing in rare coins is one of the most buoyant parts of the alternative market at the moment - with values up 10% in a year, 90% over five years, and 221% over ten years. However, this is definitely an area for experts, because unless you know what you are doing it’s easy to be taken in by counterfeits, doctored coins, and dealers who encourage you to spend more than the coin is worth.

Most people tend to start collecting coins as a hobby, investing to own something they love, hoping they will see some gains, but willing to take a loss on their collection if they ever had to sell. With this sort of approach, the big gains are likely to be well beyond your reach, as they are focused on the top end of the market. However, it should protect you from unaffordable losses if the value of your collection drops.


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