This dividend stock offers a high 13.5% yield and could be 60% undervalued

When I see a high dividend yield over 10%, I usually expect to see a badly fallen share price. And that’s exactly what RWS Holdings (LSE: RWS), with its forecast 13.5% yield, shows.

We’re looking at a 53% slump in the past 12 months, and it’s down 85 over five years. There are more bad signs that I usually expect to come with a stock like this. And, well, I’m not seeing them here. But I’ll come back to them.

What went wrong?

First-half results released in June showed adjusted profit before tax down 61% from the same period a year ago, to £18m, with a reported loss before tax of £12.7m. But we’d already been warned of a number of non-trade one-offs, so it wasn’t a surprise. A chunk of it is down to the cost of investment in technological change.

New CEO Ben Faes, who took over in January, spoke of how “changes in our mix of work and to new delivery models for certain clients have impacted profitability“.

The company provides “language, content and intellectual property services“. That includes translation and language support services. Oh, and artifical intelligence is going to take over that and make companies like RWS redundant, right?

Well, with RWS covering legal services, intellectual property, defence, aerospace… we’re talking about demand for critical accuracy way beyond anything ChatGPT and the like can offer.

Both kinds of I

RWS talks about its “combination of AI-enabled technology and human experience“. Rather than fearing it, the CEO told us: “Our AI-focused solutions continue to gain meaningful traction.” He added that the company’s strategy should enable it to “deliver accelerated and profitable growth and acquire additional capabilities through focused M&A“.

Instead of AI replacing humans, it needs humans to develop it, understand it, direct it, focus it, correct it… the kind of humans that work at RWS, with a bit of luck.

Saying that, a large-scale change in an industry’s underlying techology brings great uncertainty and elevates risk. Of that there is no doubt, and anyone considering investing in RWS needs to keep it in mind.

What red flags?

I need to get back to the red flags I look for whenever I see a huge dividend yield like this. I’m talking about weak confidence in earnings and dividends, and unimpressive share price forecasts. We don’t have those here.

Analysts expect a return to positive earnings in 2026, followed by strong growth in 2027. They don’t see any break in the dividends, though they won’t be covered by forecast earnings by 2027. But even a 50% cut would still leave a high yield, and I see a safety margin there.

As for share price targets, the consensus is 236p. The shares trade at only 88p at the time of writing. Even the low end of the range suggests 180p, more than twice the current price.

I expect the AI landscape will change dramatically in the next few years. But investors looking for tomorrow’s winners might do well to consider RWS Holdings.

The post This dividend stock offers a high 13.5% yield and could be 60% undervalued appeared first on The Motley Fool UK.

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Alan Oscroft 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.