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Brexit watch! Should you buy this 7%-plus dividend yield before 31 January?

Royston Wild
Hand drawing a red line between the UK and the rest of EU, Brexit concept.

To many people, the process of actually withdrawing from the European Union was the easy part. The difficult part of the Brexit process starts now, they say. And this is a pretty chilling prognosis in my opinion.

If it took three and a half years to complete the simple part, how long will it take London and Brussels lawmakers to get the tricky business of trade negotiations out of the way?

United Carpets Group (LSE: UCG) is a cyclical share that has surged in the run-up to the 31 January deadline, the date at which the UK will leave the continental trading bloc. Prolonged Brexit uncertainty has already smashed much of the retail sector. And there are signs that consumer confidence is continuing to slide. But could this AIM-quoted company buck the broader trend and grow profits regardless of Brexit uncertainty?

Retail data keeps getting worse

Official data from the Office for National Statistics has recently shown how month-by-month sales are having their worst streak on record, and that’s not the only retail benchmark to have hit all-time lows. The latest Retail Health Index from KPMG and Ipsos this week showed a reading of 74 for the final quarter of 2019, the poorest result since the survey began in 2006.

Worryingly the index – which takes into account consumer demand, costs, and gross margins – is tipped to remain at the current low during the first quarter of 2020.

A great trading update… right?

Market makers were expecting some shocking half-year trading numbers from United Carpets last month in reflection of these tough conditions. But the statement was much better than most had expected. In response, the retailer’s share price burst above 6p per share for the first time since late 2018.

United Carpets said that its store expansion programme helped revenues leapt 36.3% in the six months to September. Meanwhile, like-for-like sales were up 1.8%, and pre-tax profits improved to £154,000 from £121,000 a year earlier.

This news didn’t quell my cautious take on the business, however. My mind was more concerned with the 3.5% fall in like-for-like sales that the floor coverings giant endured during the 11 weeks from the end of the period.

What should you do, then?

City analysts expect United Carpets to bounce from a mild 2% earnings fall in the current fiscal year (to March 2020) to a 20% earnings rise in financial 2021. However, these figures – based on those new store openings – look more than just a little fragile in the current climate. It’s why the business boasts such a low rating, a forward price-to-earnings ratio of 11 times.

So you can keep its cheapness as well as its big 7.6% dividend yield. This is a share that carries far too much risk in 2020 and possibly beyond, and in my opinion, it should be avoided at all costs.

The post Brexit watch! Should you buy this 7%-plus dividend yield before 31 January? 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