Why I'd sell this Neil Woodford 8% yield (and buy this stock instead)
Investment fund manager Neil Woodford is regarded by many as a superstar stocks guru for a reason. Indeed, I have spent some time recently looking at some of his favourite companies and have to share his optimism on these stocks as well as countless others on his holdings lists.
However, I was running the rule over his Woodford Income Focus Fund again the other day and couldn't help but be concerned by some of its names. Saga(LSE: SAGA) is one such stock I'm far from convinced by right now.
At face value, Woodford looks like he might well be onto a winner, however.
According to City consensus, the FTSE 250 insurer is expected to print a 1% earnings decline in the year to January 2019. This is clearly no reason for wild celebrations, but it does mark a step in the right direction from the predicted 6% decline for last year. And Saga is expected to return to growth with a 2% profits rise next year.
With the number crunchers predicting a steady medium-term outlook, Saga, helped by its robust balance sheet, is expected to keep dividends marching higher despite this anticipated profits turbulence.
An 8.9p per share reward is forecast for last year, and this is expected to rise further, to 9p and 9.2p in fiscal 2019 and 2020, respectively. Consequently, share pickers can enjoy spectacular yields of 7.7% for this year and 7.8% for the following period.
But I'm more than a little perturbed by Saga's investment outlook in the wake of December's chilling profit warning which sent shareholders flocking to the exits. The FTSE 250 business has been shaken by rising competitive pressures in recent times and these look set to worsen, putting sustained pressure on the broking division's margins.
Some would argue that a forward P/E ratio of 8.9 times more than bakes in these troubles. I'm not convinced, however, and wouldn't be surprised to see Saga's share price plunge again.
A better Woodford pick
I would be far happier splashing out on Watkin Jones(LSE: WJG), instead.
Like Saga, the student accommodation provider is favoured by Neil Woodford and, in my opinion, looks to be in better shape to meet broker expectations for chunky dividends. Watkin Jones continues to busily expand, cottoning on to favourable dynamics in the market. It currently has a development pipeline of above 9,800 beds, of which 8,300 have already received planning consent.
City analysts are forecasting earnings growth of 8% and 6% in the years to September 2018 and 2019, respectively. And these figures lead to predictions of dividend expansion from 6.6p last year, to 7.4p this year and 8p next year, meaning yields for these years stand at 3.8% and 4.1%.
An ultra-low forward P/E ratio of 12.8 times underlines Watkin Jones's brilliant appeal, too.
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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.