Debenhams is yielding over 6% that is three times higher than the UK deposit rate. Does this make it a dividend income stock?
As one of Britain oldest department store. (it has over 200 years of history) It knows a couple of things about being competitive. It survived more than seven generations, so it must be durable. The company is so old, the customers were arriving at their stores on horseback!
But, there are counterarguments about the risk of high-yield, more on that later.
A Brief Background
Debenhams was taken over in 2003 by three private equity firms. It got loaded up with debt in three years and was back in the market. In 2006, the IPO price was £1.95/share, it raised £950m, and within two years the stock lost 80% of its value.
The reasons given are the UK got
caught up in a financial crisis. This led to Debenhams making less money,
whiles it tries to reduce debts on its books.
stock
The reasoning for the purchase
of a high-yielding dividend stock are:
1. It puts a floor on the stock price;
2. Dividend paying stock don’t rely completely on capital gains;
3. Dividends can give you staying power;
4. The company may be solid;
5. They pay you to hold them (a trivial point);
6. They outperform the market;
7. Instil discipline in management;
8. Shareholder friendly;
9. Their value is easy to understand;
10. Dividends income gives you extra income (£5,000 tax-free).
On the flip side, there are valid reasons to avoid high dividend stocks.
These can be:
1. The business no longer has a competitive advantage over rivals;
2. It is no longer generating cash and has a lot of debts in their books;
3. The company is cyclical in nature, as the dividends are likely to get cut;
4. Government policies change affect the fundamentals of the business;
5. It can go bust!
So, which camp does Debenhams belong in?
Does
Debenhams’s High Yield Represent Value or a Value Trap?
The Debenhams “deleveraging” Process
One reason why people consider dividend stock a value trap is too much debts in the balance sheet.
Debenhams shares never recovered back to £1.95/share. Since the financial crisis, the stock trade in a range between £0.25/share to £1.10/share. Now, it fetches…
