Income stalwart National Grid (LSE: NG) is usually considered a high-yield stock, but the grid operators 5.2% yield is dwarfed by the cash-backed 9.5% prospective yield on offer at GVC Holdings (LSE: GVC)?
Of course, there are some obvious differences between the two firms.
National Grid is a 32bn FTSE 100 giant with a regulated income and a captive market. GVC is a 266m AIM-listed online sports-betting firm. This is a sector where profits and market share can be very volatile.
Despite this, GVCs growth has been impressive. Todays interim results from the company suggest that there could be more to come.
Betting profit
GVC said that wagers rose by 18.6% to 824m during the first half of the year. Net gaming revenue, which is total wagers less payouts, rose by 15.1% to 121m.
Although these figures imply that GVCs punters won slightly more often than in the first half of 2014, this slight downside is outweighed by the strong rise in activity levels, in my view.
Adjusted earnings per share rose by 25% to 0.33 per share, suggesting the firm should be able to meet current full-year forecasts for earnings of 0.70 per share. This puts GVC shares on a forecast P/E of about 8.5.
GVCs dividends are paid from the firms free cash flow, which was 20.8m during the first half. Of this, 17.2m was paid out as dividends, giving a payout for the year to date of 0.42 per share. Thats a 5% increase on the first half of 2014.
Bwin acquisition
GVC is focused on expansion and is currently in the middle of a bidding war with 888 Holdings to acquire Bwin.party Digital Entertainment.
Bwins management has previously recommended 888s offer, but GVC is expected to make a final proposal to Bwin early next week.
The acquisition of Bwin could be transformative for GVC, if successful. Bwins 2014 revenues of 612m were almost three times those of GVC during the same period.
What about National Grid?
Despite GVCs attractions, there are risks. The firm faces the constant risk of regulatory changes and tax hikes which could slash its profits. Unforeseen problems such as those which affected Plus500 earlier this year are also a possibility.
None of these risks need to concern investors in National Grid. The firm enjoys good long-term earnings visibility, and in 2013 committed to a dividend policy of inflation-linked increases for the foreseeable future.
National Grids 5.2% yield may not have the wow factor of GVCs 9.5% forecast yield. But its worth remembering that the market consistently values GVC on a low P/E and with an exceptionally high yield. The most likely reason for this is that investors believe the firms profits and dividends may not be sustainable.
Of course, the market consensus view about GVC could be wrong. It could be a cracking buy. However, online gambling isnt exactly a stable, mature industry. Sudden changes in outlook are a fairly regular occurrence.
Investors choosing to dump National Grid in favour of GVC need to be very confident that GVCs business model will continue to deliver strong results.
Identifying companies that can provide a secure long-term income isn’t always easy.
If you’re looking for some expert tips on picking the best dividend payers, then I’d suggest a look at “How To Create Dividends For Life”.
This exclusive Motley Fool report contains details of the five golden rules of dividend investing.
I can’t share the details here, but I do believe they could help you decide whether GVC is a buy.
This report is FREE and without obligation.
To receive your copy today, simply click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.