Does Saga PLC offer income investing potential?

Could Saga PLC (LON:SAGA) (SAGA.L) deliver improving income prospects?

Saga PLC
Saga PLC

With a dividend yield of around 8%, Saga PLC (LON:SAGA) (SAGA.L) continues to be one of the highest-yielding shares in the FTSE 100 at the moment. In fact, its yield is around 370 basis points higher than that of the wider index, with it being 3.3x higher than inflation.

One reason for its high yield is its disappointing share price performance over the last year. The company has struggled to recover after releasing a profit warning towards the end of 2017, with it due to post a fall in EPS in the current year. Although an EPS recovery is expected next year, its growth rate is due to be in the low-single digits.

Saga faces a more competitive industry outlook according to my research. Its customer acquisition costs have increased, and this could squeeze its margins and profitability to some degree in the short run.

As a result of this, the company may be unable to raise dividends significantly over the next couple of years. However, with dividends being covered 1.5x by profit, they seem to be affordable at the moment in my view. Further, with the stock offering a relatively high yield, it could offer income investing appeal over the medium term to my mind.

With the Saga share price having fallen in the last year, it now has a P/E ratio of around 8.5. This suggests that investors are demanding a large margin of safety while it experiences challenging trading conditions. This could suggest that it offers recovery potential and may be able to offer a relatively appealing risk to reward ratio to in my view.

With the company having made changes to its management team and put in place a refreshed strategy, I’m optimistic about its long-term prospects. However, in the short run it could continue to lag the index as a result of its lack of meaningful EPS growth over the next couple of years.

About Robert Stephens 5138 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email [email protected] or use one of the other contact methods available on the 'Contact Us' page