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Should you be tempted by these high-yield stocks?

Should you be tempted by these high-yield stocks?

Author: Jack Tang

Published by
Motley Fool

3m read

10 November 9.06am

Hargreaves Lansdown is not responsible for this article's content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest. Article originally published by Motley Fool.

FTSE 250 satellite company Inmarsat has been going through a difficult patch as the capacity glut in the sector stokes competition and weighs on pricing.

The launch of high-bandwidth satellites in recent years has brought more capacity online than ever, but demand has not kept up with its pace due to external headwinds, which include an under pressure maritime environment and weakness in business aviation

Amid these concerns, investors have become increasingly concerned that its dividend could be jeopardised. Dividend cover, a simple gauge of safety which is calculated by simply dividing the company’s net income by the amount of dividends paid to shareholders, was only 1.2 times for the company last year.

Looking ahead, cover could fall below 1 times in the coming years as competition continues to hurt margins. This would mean the company would have to borrow money or sell assets to maintain the payout, which may become difficult as the group’s costly capital spending plans and its indebted balance sheet would eat into free cash flows at a time when profits are shrinking.

Better-than-expected revenues

Inmarsat Plc

Sell: 481.70 | Buy: 482.00 negative 0.20 (-0.04%)
Graph

Prices delayed by at least 15 minutes.

The company today reported a better-than-expected 4.8% increase in its third quarter revenues, allowing Inmarsat to deliver faster growth than many of its competitors. This was mostly down to a 50.1% jump in revenue from its aviation unit, which reflected an increase in the number of installed aircraft and higher customer airtime usage.

Despite the impressive revenue figures, the group’s EBITDA was 6.5% lower, at $191m, reflecting the prioritisation of revenue growth over margins. Additionally, management narrowed expectations for full-year profit to a range of between $1.23bn and $1.28bn, from $1.2bn to $1.3bn.

Looking ahead, CEO Rupert Pearce said that although “markets remain challenging and the outlook continues to be difficult to predict”, he continues to be “confident” about the longer-term prospects.

But judging by the share price reaction today, investors don’t seem convinced. Although Inmarsat shares initially rose as much as 6% on the revenue beat in early trading, they’ve since fallen to an 8% decline by mid-afternoon.

Uncertain outlook

Stagecoach Group plc

Sell: 161.90 | Buy: 162.00 positive 0.30 (0.19%)
Graph

Prices delayed by at least 15 minutes.

Elsewhere, transport group Stagecoach is warning of an uncertain outlook as lower fuel prices and recent terror attacks hit demand for bus and rail services. The company is also in talks with the government over its contract to operate the East Coast Main Line after exceptional charges linked to the troubled franchise saw profits at the company tumble last year.

Looking ahead, its outlook may be less bleak. Although passenger numbers aren’t expected to rebound any time soon, the longer-term fundamentals for public transport remain intact. Factors ranging from population growth, increasing urbanisation, congestion and trends in government policy suggest the recent weakness in passenger demand is just a setback in the longer-term structural growth story.

And in the short run, Stagecoach is not rudderless - it is in a stronger position than its rivals to raise prices on its UK bus services as it has lower average bus fares than its competitors. Some relief may also come from its negotiation of its East Coast contract following delays caused by infrastructure work, which could also lift earnings in the medium term.

As such, I reckon Stagecoach is a better high-yield play. Although its dividends are far from guaranteed, the company seems to me in a better position than Inmarsat to sustain dividend payouts at current levels.

This article was written by Jack Tang from The Motley Fool UK and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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  • 10 November 9.06am
  • 3m read

  • AAA

Article originally published by Motley Fool. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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