While the FTSE 250 is not known as a particularly attractive place to find high dividend yields, Saga (LSE: SAGA) could be an exception. While the index has a dividend yield of little over 3%, the over-50s travel and insurance specialist has a yield of 8%.
Certainly, the company’s share price fall has boosted its dividend yield. However, it could offer improving financial prospects which have not yet been factored into its valuation by the stock market. Alongside another dividend stock which released results on Thursday, it could be worth buying for the long run.
Growth potential The company in question is Coca-Cola HBC (LSE: CCH), which is a leading bottler for The Coca-Cola Company (NYSE:KO). It released full-year results that showed net sales growth of 6% on a constant currency basis. This is its second year of growth above its 4%-5% target range, with the business making further progress towards its 2020 margin targets.
Volume growth accelerated to 4.2%, with rises experienced in all segments. This was driven by Sparkling beverages, while there was continued momentum in Emerging and Developing segment countries. The company was also able to deliver a 20 basis point reduction in operating expenses as a percentage of revenue, with innovation and an investment in marketing boosting its overall performance.
With Coca-Cola HBC having a dividend yield of 2.4%, it may not appear to be an attractive income stock. However, with this year’s dividend payment expected to mean that it has raised shareholder payments at an annualised rate of 11% over the last five years, its dividend growth rate could be high over the long run. Dividend cover of 2.2 suggests that further increases could be ahead.
Margin of safety As mentioned, the Saga share price has experienced a challenging period in the last couple of years. Disappointing financial performance has caused investors to become increasingly bearish about the stock’s outlook. This has resulted in it offering a wide margin of safety, with a price-to-earnings (P/E) ratio of 8.5 suggesting that the stock could have value investing potential.
In terms of its financial outlook, the company faces a difficult future. Recent updates have shown mixed performance across its various segments, with a competitive environment weighing on its prospects. However, with it making attempts to improve customer loyalty in order to widen its economic moat, it could deliver improving financial performance over the long run.
In terms of Saga’s income prospects, net profit growth of 2% forecast for this year suggests that it may lack dividend growth potential. However, with its dividend yield of 8% being significantly higher than many of its FTSE 250 peers, it could generate impressive income returns in the long run. Since dividends are covered 1.5 times by profit, they seem to be affordable. This may convince investors that the stock retains its income appeal despite facing a tough operating environment, which could positively impact on its share price performance.
Peter Stephens owns shares of Saga. 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 2019