Does a 10% yield mean B&M makes my list of stocks to buy after 2024 results?

The best time to buy a stock is when it’s cheap and B&M European Value (LSE:BME) certainly looks that way right now. The share price is down another 7% after its full-year results on Wednesday (4 June).

Profitability has been the key issue for the last year or so, but the company’s returning a lot of cash to shareholders. So is it worth a look ahead of a potential recovery?

The results

Overall, there isn’t much to like about B&M’s latest results. The headline is that revenue growth was just 1.6% – below inflation – and like-for-like sales in the UK were lower than the previous year.

This however, had already been announced in the company’s update from 15 April, so this shouldn’t be why the stock’s falling. The latest news however, concerns the firm’s profitability.

Despite the higher sales, operating earnings and earnings per share were both lower than the year before. And I think this is something that should immediately concern investors.

During the year, B&M distributed a total of 30p per share in dividends. Half of this was the ordinary dividend and half was a special distribution.

Based on the current share price, that’s a yield of around 10%. However, adjusted earnings per share came in at 33p, so there’s a real question about how sustainable this is going to be.

B&M has ambitious plans to increase its store count going forward. But the firm will have to find a way to generate more profit if it’s going to maintain its dividend while it does this.

Reasons for optimism

From an investment perspective, I can see three major reasons for optimism. The first is a secular trend towards discount retailing, which B&M notes in its release.

The company’s biggest advantage in this industry is its direct sourcing model. This allows it to buy products at lower prices, enabling it to pass on those savings to customers.

There’s also a new CEO starting later this month. Ordinarily, this is something I consider to be a potential risk, but with B&M’s profits faltering, it might be a positive sign.

Tjeerd Jegen’s an experienced retail executive who might be able to reinvigorate the business. It won’t be straightforward, but there’s something else that could help in the short term.

It sounds trivial, but I think the UK’s recent good weather is more important than it seems. An unusually dry start to the year has resulted in greater high street footfall, which is helpful.

The likes of Greggs and JD Wetherspoon have benefitted from this and I expect B&M to as well. I think this is a good sign that profits for the upcoming year might be higher than the previous one.

Should I buy?

I think anyone who owns (or is considering buying) B&M shares because of the dividend should be very careful. To me, the latest results indicate it could be in real danger.

There are however, clear reasons for optimism. But with UK retail stocks as a group trading at relatively low multiples at the moment, I’ve got my sights set on other stocks at the moment.

The post Does a 10% yield mean B&M makes my list of stocks to buy after 2024 results? appeared first on The Motley Fool UK.

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Stephen Wright has positions in J D Wetherspoon Plc. The Motley Fool UK has recommended B&M European Value and Greggs Plc. 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.