Red alert! A 5%+ dividend stock I think you should avoid in March

Royston Wild
Road sign warning of a risk ahead

Are there many riskier shares to buy today than those in retail? Embattled shopping centre operator Hammerson yesterday commented that “the magnitude of the challenge facing UK retail is significant.” This is no more apparent than for sellers of big-ticket items. And the likes of Lookers (LSE: LOOK) sell some of the most expensive products out there.

New car sales continue to sink in the UK as recent data from the Society of Motor Manufacturers and Traders shows. The number of new registrations plummeted 7.3% in January because of weak demand from private customers and poor fleet renewal rates.

With Brexit uncertainty threatening to run through 2020 and, in turn, posing a threat to consumer confidence (and especially for goods with big price tags), it’d take a brave man to predict that Lookers and its peers will enjoy a revenues renaissance any time soon.

On the ropes

The small-cap certainly spooked investors last time it updated the market in February. Then it said like-for-like sales of new vehicles had toppled 6.6% in the final three months of 2019. This was worse than the 3.2% drop it punched in the prior quarter and much, much worse than the 1.6% fall recorded by the wider British market.

I dread to think what Lookers’ upcoming annual results on 11 March, will reveal. Data shows the retail sector has failed to receive the ‘Boris Bounce’ that other parts of the UK economy have. There’s a good chance of current profits forecasts for Lookers will be hacked in the coming sessions. City analysts currently expect the motor retailer’s earnings to jump 16% year-on-year in 2020.

Lookers’ share price has succumbed again following a strong start to the year and it is now  20% lower from levels at the turn of January. At current prices it’s cheap, sure. The retail play trades on a forward price-to-earnings (or P/E) ratio of 13.3 times. But it’s not cheap enough to reflect the high probability of meaty earnings projection cuts as 2020 rumbles on. A reading below the bargain-benchmark watermark of 10 times is a fairer reflection of its high risk profile.

5.2% yield? No thanks

I also worry that a painful dividend cut could be in the offing. One which could add extra stress to the share price. Lookers kept the interim payout on hold at 1.48p per share, but City analysts expect the full-year payout for 2019 to drop to 2.7p from 4.08p in 2018.

I fear that a bigger-than-expected reduction be effected, though. Net debt is falling but Lookers still had £62m on its books in December. That forecasted dividend is also covered just 1.2 times by anticipated earnings. With dividend coverage sitting at just 1.5 times for 2020, I reckon this year’s dividends could also disappoint.

So forget about that giant 5.2% dividend yield, I say. For me, Lookers is a share that should be avoided at all costs right now.

The post Red alert! A 5%+ dividend stock I think you should avoid in March appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2020