2 bargain basement turnaround stocks offering 6%+ dividend yields

P/E ratios under 11 and dividend yields over 6% put these turnaround stocks at the top of my watch list.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Royal Mail (LSE: RMG) recently suffered the ignominy of being relegated from the FTSE 100 after its share price shrank more than 25% in the past year alone. But with the value of its shares now hovering only slightly above their IPO price, the company’s dividend yield is up to a whopping 6% and is still covered 1.9 times by earnings. So is Royal Mail an unbeatable option for income investors at its current valuation of 10 times earnings?

Well, the problems the company faces are very real. First up is the steady decline in letter usage that is almost assuredly going to continue indefinitely. In fiscal year 2017 letter volumes shrank 6% year-on-year (y/y) and revenue fell 5% to £4.3bn.

However, the company is making up for the decline in letter usage by shifting resources into parcel shipping and this business is booming thanks to e-commerce. Last year, parcel revenue rose 3% y/y to £3.3bn in the UK and European operations recorded a 9% y/y revenue uplift to £2.5bn. While this is a fiercely competitive market, even if the company only grows sales slightly ahead of the market it will be hugely beneficial for the bottom line.

Management is also in the midst of a dramatic transformation programme that involves trimming operating costs, investing in more efficient sorting facilities and selling off high-priced London real estate that isn’t being fully used. The positive effects of this programme are now beginning to pay off with earnings per share last year rising to 27.5p from 21.5p and cash flow rising substantially.  

That said, prospective investors should be cautious right now as the company is embroiled in a fierce fight with unions over phasing out its current defined benefit pension scheme. From an investor perspective this makes sense as management expects costs related to funding annual pension payments to rise from £400m to over £1bn in the coming years. But with the workers’ union threatening a strike, I’d wait to invest in Royal Mail until both sides come to an agreement and its financial effects are made public.

A falling knife to catch?

Another high-yield stock that’s been battered recently is replacement window and door manufacturer Safestyle (LSE: SFE), whose share price is off by over 25% in the past year. This has been caused by a couple of profit warnings due to falling consumer demand across the industry earlier this year.

However, this problem hasn’t affected its ability to pay out a dividend that analysts expect to yield 6.6% this year. In fact, although H1 earnings per share fell 11.7% to 8.3p, this still safely covered the interim dividend of 3.75p. And with operations still generating impressive cash flow and net cash of £17.7m on the balance sheet, the full-year dividend in the 11p range should be very safe indeed.

This industry-wide downturn is also a blessing in disguise for Safestyle. The company has a major leg up over competitors from owning its factory, which significantly lowers costs and lead times for getting new products to market. This means it can sacrifice on pricing and temporarily reduce margins to take market share from competitors, something it has done very successfully before. Safestyle isn’t without risks but its healthy yield, bundles of cash and attractive valuation of 11 times forward earnings has me very interested.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »