The following two companies offer blisteringly high dividend yields at a bargain price, but they also have a fight on their hands as consumer spending slows. Do the rewards outweigh the risks?
Frankie & Benny’s owner The Restaurant Group(LSE: RTN) is up 2% in early trading despite posting a 3.7% drop in like-for-like sales this morning, which shows just how how far investor expectations have fallen in the dining-out sector.
After a tough three years where the share price has fallen 60%, the market preferred to focus on the news that sales rose 2.4% in the six weeks to 26 August as the group enjoyed “good momentum post the end of the World Cup”. Investors also swallowed the positive management line that it has made “further progress to increase competitiveness of our brands”, while its pubs business outperformed the market.
The Restaurant Group is also growing through acquisitions, notably the post-period purchase of Food & Fuel consisting of 11 premium leasehold pubs in affluent London locations for £14.9m.
This is a company in turnaround, though, with adjusted profit before tax for the 26 weeks falling from £25.5m to £20.1m, adjusted EBITDA down from £44.3m to £38.1m and adjusted earnings per share (EPS) dropping from 10p to 7.8p. Operating cash flow fell sharply, from £46m to £25.6m.
Hard to swallow
CEO Andy McCue said extreme weather and the World Cup were challenges for its brands, which also include Garfunkel’s, Coast to Coast, Chiquito and Joe’s Kitchen. However, thanks to the recent pick-up it is on course to hit profits expectations, allowing the board to maintain the interim dividend at 6.8p per share.
It now yields a forecast 6.2% although cover is thin at 1.3. These concerns are reflected in a price of 12.8 times earnings. EPS are forecast to fall 3% in 2018, then grow 5% in 2019. My Foolish colleague Edward Sheldon has little appetite for it, and I would chew this one over very carefully too.
Digital fashion retailer N Brown Group (LSE: BWNG) has been an even more brutal disappointment, falling 56% in the last year. Since peaking at around 587p in February 2014 it has withered to just 147p, leaving loyal investors seriously browned off.
The group has been hit by challenging conditions in the retail sector, but net-based shopping has been a rare bright spot, so you would hope that N Brown could get it right here at least. There are signs of progress, with total online revenues up 3% in the last quarter and so-called Powerbrands like Jacamo and JD Williams rising 9%.
The Manchester-based group is considering closing its final 20 stores, which should slash overheads and sharpen its focus on the web. The £420m enterprise is trading at a dirt cheap valuation of just 6.2 times earnings and despite holding its dividend at 14.23p for the last five years it yields a whopping 10%.
EPS are forecast to fall 1% this year but rise 5% in 2020. This could be a good fit for your income portfolio, if you don’t mind taking a gamble on management finally getting its digital strategy right.
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harveyj 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.