Why I'd sell this turnaround stock to buy this unloved 7.5% yielder
Shares in casual dining operator Restaurant Group(LSE: RTN) are rising this morning after the company reported a profit for the year to the end of December 2017, against last year's loss. Specifically, the group reported a statutory profit before tax of £44m compared to the previous year's loss of £49m.
However, while these figures may look impressive at first glance when you dig into the numbers, they're less exciting.
On an adjusted basis, excluding any pre-tax charges, profit before tax for the year fell by £20m from £77m to £57m. Adjusted earnings before interest, tax, depreciation and amortisation fell to £95m from £121m and adjusted earnings per share declined 26% year-on-year from 30p to 22.3p. Like-for-like sales for the year ticked 3% lower.
Overall, these numbers look pretty disappointing, but there are some bright spots in the report. For example, net bank debt fell to £22m from £28m, and the company generated free cash flow from operations of £85m, up from £79m last year. Even though profits are falling, this strong cash generation allowed management to maintain the group's full-year dividend at 17.4p, indicating a dividend yield of 6.7% at current prices.
What does the future hold?
Looking at the figures above, I believe there's no reason why the current dividend payout cannot be maintained. That being said, the outlook for the casual dining industry is bleak. Companies are struggling to deal with the triple threat of changing consumer tastes, rising costs and falling real incomes, and it's estimated that one in three of the top 100 restaurant groups in the UK is now unprofitable.
Restaurant Group, which owns dining chain Frankie & Benny's, is not immune from these pressures. The group has already undergone an aggressive restructuring and management is targeting a further £10m of cost cuts over the next year.
Despite these measures to cut costs, I believe that it's going to be some time before growth returns, considering the pressures impacting the broader food industry. With this being the case, even Restaurant's market-beating dividend yield and valuation of just 11.1 times forward earnings is not enough to convince me to buy the shares.
One 7.5% yielder I am positive on, however, is NewRiver REIT(LSE: NRR). This real estate investment trust owns a portfolio of approximately 30 shopping centres, 20 retail warehouses and 360 pubs, giving it a diversified income stream with over 2000 occupiers.
The sector's best buy?
Recently, shares in NewRiver have come under pressure due to concerns about the rising number of insolvencies in the retail sector and the impact this is having on landlords. But while some landlords might be feeling the heat, NewRiver is not.
At the end of January, the company reported that like-for-like footfall was up over the quarter by 0.5% and 1.9% during December "significantly outperforming the national benchmark." Meanwhile, group occupancy was a record 97% at the end of the period.
These figures give me confidence that NewRiver can continue to outperform its peer group and maintain the high single-digit dividend yield. A low loan-to-value ratio of only 25% also means that the firm has plenty of headroom on the balance sheet to fund the expansion of its property portfolio as well, hinting that the dividend payout could expand further in the years ahead.
The market's best growth stock?
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This well-known FTSE 250 growth stock could be on track to grow its market value from £1.3bn to £4bn over the coming years, suggesting a gain of up to 200% might be possible for investors. Its outlook is certainly a lot brighter than that of Restaurant Group.
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Rupert Hargreaves owns no share 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.