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2 high-yielding contrarian stocks I’d continue to avoid

Paul Summers

There’s no shortage of high-dividend-paying stocks in the market right now. That said, those investing for income need to tread carefully as companies offering the most enticing yields are sometimes those experiencing the most difficulty

With this in mind, here are two stocks that I think justify a continued wide berth.

Weak footfall

Anyone hoping that today’s trading update from mid-cap homewares retailer Dunelm Group (LSE: DNLM) — covering both the 13-week period and the 12 months to the end of June — would generate a reversal in the share price would have been disappointed. The stock has been in negative territory all morning. It’s not hard to see why.

Total like-for-like revenues increased by just 0.1% in Q4, despite stellar growth online (+41.8% to £30m).

Perhaps most significantly, footfall at its 169-store estate was described as “weak“, with a 4.6% drop (to £179m) in like-for-like sales. This led the company report that the amount of clearance merchandise left over had been “greater than normal“, forcing Dunelm to increase its provision for future losses by roughly £3m and thus lowering gross margins for Q4.

Given that trading over the full year was actually acceptable — like-for-like revenue growth of 4.2%  (to £910.4m) and overall growth of 9.9% (£1050.1m) — these latest numbers aren’t exactly encouraging and suggest things could get worse for holders before they get better.

The company now expects pre-tax profit of around £102m for the year. This figure is quite a bit lower than the £109.3m reported in 2016/17 but it does include roughly £8.5m in trading losses from Worldstores which Dunelm acquired back in 2017.

On 11 times expected earnings for the current year, the Leicester-based business isn’t quite in the stock market bargain bin. Yes, the 5.4% yield is attractive but, taking into account its rising debt levels and fragile consumer confidence, I’m more than prepared to sit on the sidelines until the aforementioned integration of Worldstores is complete. 

Still overpriced

Dunelm isn’t the only stock I’d continue to avoid. My bearish stance on Frankie and Benny’s owner Restaurant Group (LSE: RTN) is as solid as ever.

May’s pre-AGM update provided a snapshot of just how difficult the current trading environment is for the company. 

Like-for-like sales and total sales fell 4.3% and 3.1% respectively in the 20 weeks to 20 May, not helped by the Beast from the East weather front coming to the UK. Despite this, management said it expects to deliver full-year results in line with market expectations.

That, however, was two months ago. Since then, we’ve had a period of exceptionally good weather. While not a gambler by nature, I’d bet that the vast majority of potential visitors will have opted to spend their time outside with a BBQ over being inside a restaurant in a retail park. 

I get that management is trying. The decision to acquire and open more pubs makes sense given that these “continue to outperform the market“. The opening of “at least” 12 new sites at travel hubs is equally understandable given that these cater to a captive audience.

Nevertheless, I think Restaurants Group’s shares — currently changing hands for 13 times forecast earnings — still look way overpriced. The meaty 5.9% dividend yield on offer looks tasty, but even this could come under pressure if the company’s next update is as bad as I suspect it now might be.

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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.