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One 5% yielder I’d buy and one I’d sell after today’s news

Rupert Hargreaves
A bull outlined against a field

Despite management’s best efforts, toymaker Character (LSE: CCT) has been unable to avoid the headwinds facing the broader retail sector over the past year.

The firm was hit particularly hard by the demise of Toys R Us, one of its largest customers. The bankruptcy forced Character to warn last year that results for the year ending August 2018 would be “significantly lower than market expectations” following the loss of income from the UK’s largest brick and mortar toy store.

Major setback 

The Toys R Us demise is already having a significant impact on Character. Today, the company published its financial figures for the half year ended February, showing a 36% decline in operating profit and similar contraction in pre-tax profit. Basic earnings per share for the period fell 38% year-on-year, and after including the impact of adjustments on foreign currency derivative positions, basic earnings per share declined 92% year-on-year. Group net cash was £14.3m, down from the £18.6m reported at the end of the same period last year, but up from the £11.5m reported at the end of August 2017.

However, despite Character’s dismal performance during the first half, management is upbeat on the outlook for the rest of the year as the Toy R Us fallout dissipates. 

We continue to have great strength and depth across our brands and a wide range of long-term customers and suppliers,” the half-year update noted, continuing, “the directors remain optimistic that the business will see a return to its previous growth pattern during the second half of this financial year.

Still, despite management’s optimism, I’m wary about Character’s outlook as the group has disappointed on growth several times in the past. With this being the case, even though the shares might look attractive today, trading at a forward P/E of 11 and supporting a dividend yield of 5.1%, I’m in no rush to buy the stock.

Slow and steady wins the race 

On the other hand, I’m more optimistic about the outlook for financial services business Chesnara (LSE: CSN)

This is a holding company engaged in the management of life and pension books of businesses in the UK, a relatively stable and predictable industry. The enterprise buys life insurance funds closed to new customers and then manages them to maximise profit for investors

So far, Chesnara’s strategy has produced fantastic results. The dividend has grown at a steady rate of 3% per annum over the past five years and including the dividend, the shares have produced a total average annual return of around 16% per annum since 2012, smashing the FTSE 100 over the same period.

As the company continues to consolidate its position in the market, by buying up unwanted pension businesses, I believe that this performance is set to continue. 

With this being the case, compared to struggling Character, which will remain at the mercy of consumer trends, Chesnara, with its more stable and predictable business model (as well as the long-term income stream from pension management) looks to be the better investment. The shares currently support a dividend yield of 5.1%.

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Rupert Hargreaves owns no share 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.