November has proved to be a real washout for Dixons Carphone (LSE: DC) and its share price. Sharp selling has seen the electricals retailer lose a whopping 8%, possibly in anticipation of a scary set of numbers when interims, covering the period to October, come out on December 12.
Intense political and economic uncertainty means UK shoppers continue to keep their cash in their pockets than splurging, and particularly so on big-ticket items. This was perfectly illustrated by latest data from the CBI which showed another fall in retail spending in November (41% of retailers saw sales falling versus 38% who witnessed a rise).
A risk too far?
It’s no wonder City analysts reckon earnings at Dixons Carphone will fall 28% in the current fiscal year (ending April 2020). And the prospect of profits sinking beyond that period, as the FTSE 250 business battles structural problems in its key mobile phones market, means a predicted profits rebound in fiscal 2021 looks a little too hopeful, even in spite of the upcoming introduction of 5G technology.
This is why I’m happy to overlook the retailer despite its low forward P/E ratio of 8.3 times and jumbo 5.6% dividend yield. The risks to any earnings recovery are great, with a no-deal Brexit threatening to affect the whole of 2020 at least.
I wouldn’t be surprised to see Dixons Carphone’s share price — which has collapsed by a quarter over the past 12 months alone — experience more heavy weakness in the near term and beyond.
A better buy
I’d be much happier to stash my hard-earned investment cash into Admiral Group (LSE: ADM) instead. The car insurance giant’s share price went gangbusters following the release of some truly brilliant interims in mid-August, rising around 10% in the course of a couple of days.
But investor interest has gone rather lukewarm since then, leaving the business with some whopping dividend yields. And I reckon this provides a brilliant buying opportunity.
In that half-year report, Admiral said despite the £33m hit it took as a result of changes to the way personal injury claims are calculated — known as the Ogden Rate — pre-tax profits at the FTSE 100 firm still rose 4% in the six months to June, to £218m.
The results underlined the strength of Admiral’s brand power as, despite intense competition in the UK and the company’s decision to increase car premiums, its customer base continues to swell. Motor policies grew by around 70,000 year-on-year to 4.33m, a result that helped total policies across all of its product ranges rise to 5.32m, from 5.07m in the same 2018 period.
Also encouraging was the rate at which demand for Admiral’s household policies is taking off too (to 920,000 from 780,000 a year earlier). Although City analysts expect the business to recover from a predicted 9% earnings fall in 2019 with a 1% rise next year, I reckon the firm’s strong revenues momentum could help it to beat both these forecasts.
This is why I’d happily buy it despite a slightly toppy forward P/E ratio of 17 times. And a huge 8% corresponding dividend yield helps to take the edge off.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group. 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