Is FTSE 100 dog Kingfisher worth buying for its chunky dividend?

Finding companies offering decent dividends in the FTSE 100 these days is easy. Whether those dividends are growing (or even sustainable) is another thing entirely.

Today, I’m looking at the latest set of interim numbers from B&Q and Screwfix owner Kingfisher(LSE: KGF) and asking whether the DIY giant is still worthy of investment following a rotten few years for its owners.

Difficult environment

Despite what it describes as “solid performances” in the UK and Poland over the six months to the end of July, the company continues to be hurt by “significant weakness” in France. Group gross margin fell by 40bps over the reporting period as a result of “logistics and stock inefficiencies” across the Channel.

All told, the DIY behemoth reported a 0.6% rise in sales at constant currency to £6.08bn, although statutory pre-tax profit sank a little over 30% to £281m.

Commenting on the results, CEO Véronique Laury reflected that the current environment in the retail sector was making the task of transforming the company “more difficult than expected”.

Despite a “mixed” outlook for its main markets, she did, however, go on to state that Kingfisher was still likely to deliver its strategic milestones and had already taken action to improve performance in France.

Now halfway through its five-year transformation plan, the £5.6bn cap is taking steps to improve its operational efficiency, having generated £14m of benefits over the first half of the financial year. It’s aiming to hit the £30m mark by the end of FY 18/19.

Trading a smidgen under 11 times forecast earnings before this morning’s 7% fall, one might argue that Kingfisher’s stock already represents great value, especially as the 4.2% yield — covered more than twice by profits — looks secure for now. Personally, I think there are far better options for investors.

While the half-year dividend was maintained at 3.33p per share, the general lack of growth to the bi-annual payouts is never a great sign. Moreover, a slowing housing market, fragile consumer confidence and the looming shadow of Brexit mean that trading in the UK could start to falter. When times get tough, plans to redecorate the bedroom or sort the garden are quickly shelved. Considering that this market is currently Kingfisher’s saving grace, that’s not a position I’d want to be in as an investor.

Paper profits

It may offer a lower yield than its FTSE 100 peer (and the index as a whole) but I’d certainly be more inclined to buy a company like Mondi (LSE: MNDI) at the current time.

At 72 euro cents a share, this year’s total dividend is expected to be almost 15% higher than last year, with analysts forecasting another 6% rise in 2019. Importantly, these payouts are likely to be easily covered by profits. Based on recent trading, there’s also no indication that they won’t continue growing.

August’s half-year report contained the sort of numbers Kingfisher can only dream of. Pre-tax profit rose 6% to €490m with basic underlying earnings per share up 26% to 89.2 euro cents per share.

Having rallied almost 30% in value since December, shares in the packaging and paper company aren’t as cheap as those of Kingfisher but, despite generating higher returns on the capital it invests, they are less expensive than top-tier rivals like DS Smith and Smurfit Kappa.

A price-to-earnings ratio (P/E) of 13 for next year looks entirely reasonable based on the stable growth on offer.

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Paul Summers 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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