Are these 2 FTSE 250 8%+ dividend stocks too cheap to be true?

Two FTSE 250 (INDEXFTSE: MCX) companies paying dizzying yields for a rock bottom price. Harvey Jones asks, what’s not to like?

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To find one FTSE 250 stock paying well above 8% while trading at around seven times earnings is surprising enough, finding two is stunning. So are these dirt cheap high yielders unmissable buys, or troubled businesses to be shunned?

Nice Try

Let’s start with house builder Galliford Try (LSE: GFRD), which has a market cap of £1bn and currently pays the most generous yield on the FTSE 250, a stonking 9.02%. House builders have had a tough time since Brexit but Galliford Try’s performance has been particularly disappointing, falling 11% in the two years, while Bovis Homes is up 31% and Persimmon up 35%.

Galliford Try has had problems of its own, suffering £98m over-run costs on its Aberdeen bypass contract, and up to £40m following the compulsory liquidation of Carillion. Management launched a £157.6m rights issue, completed in April, despite having the funds to meet all its obligations. It said the losses meant diverting capital from its Linden Homes and Partnerships & Regeneration businesses, which might miss out on some attractive growth opportunities.

Aberdeen anguish

Last month, Galliford Try reported full-year results were on track, with underlying debt lower than expected, although bad weather added more costs to its Aberdeen bypass project. CEO Peter Truscott insisted it’s on track to deliver further profitable growth over the full year, with profits, before tax and exceptional items, set to hit analyst expectations of £138m-£146m.

Galliford Try currently trades at a bargain 6.5 times earnings, although City analysts predict a 2% drop in earnings per share (EPS) in the year to 30 June 2019. The current yield is covered twice but is forecast to slip to 7.3%, while operating margins are thin at 2.13%, and return on capital employed (ROCE) is just 0.06%. This is still a tempting income play, for those happy with risk. Foolish colleague Roland Head is a buyer.

Stage is set

The second most generous yielder on the FTSE 250 is Stagecoach Group (LSE: SGC), currently paying 8.78%. The £780m company, which runs trains, buses, trams and express coaches in the UK, US and Canada, has a dismal share price performance, with the stock trading 66% lower than three years ago.

It’s valued at just 5.6 times earnings, but operating margins of just 0.54% and ROCE of 0.07% suggest a business that’s labouring in the slow lane. Full-year profits took a one-off hit from the Beast from the East in the UK, and similarly wild weather in North America, although like-for-like revenues did grow.

Slow coach

Stagecoach and Virgin Group have jointly lost more than £200m on their East Coast franchise, which operates intercity services between London Kings Cross and Scotland, and has since been nationalised. Now could be a time for brave investors to take advantage of negative sentiment, while also crossing their fingers that the East will not unleash another Beast next year.

Be warned, City analysts reckon EPS could fall 18% in the year to 30 April, then 11% and 9% in the two years that follow. The worry is this could imperil the yield, which currently has cover of 1.6. A cut of say, one third would still leave a pretty handy cheap income play, but Stagecoach would not be my first stop.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

harveyj 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.

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