Shares in gaming software provider Playtech (LSE: PTEC) jumped in early deals this morning after the company published its results for the year ending 31 December 2018.
The business reported a 54% jump in reported revenues and an 11% increase in adjusted net profit. However, reported net profit declined 50%, and management has made the decision to reduce the firms dividend payout by a third, yanking back Playtechs dividend yield from around 8% to 5.5%.
Maximising shareholder returns
Management says the reason why it has decided to cut the dividend is to maximise efficiency of shareholder returns. Instead of paying cash out to investors, Playtech is returning 40m through a share buyback. Considering the stocks current valuation (its trading at a forward P/E of 6.8) this seems like a sensible decision.
Having said that, I would sell Playtech after todays results as I can see several red flags in the numbers. Specifically, Im concerned that 2019 wont be as strong as 2018 in terms of revenue growth.
For example, in todays results release, the company notes regulated B2B Gaming revenue for the first 49 days of 2019 was up 7% on the same period in 2018, although non-regulated gaming revenue for the same period declined 26%.
The company goes on to guide that it expects to report adjusted EBITDA in the range of 390m-415m for 2019, up from 2018s figure of 343m, although this is assuming the Asian business remains stable. Further down the release, the firm notes underlying adjusted EBITDA decreased by 21% compared to 2017, predominantly due to the fall in revenues from Asia. If Asian revenues declined substantially in 2018, I think it is reasonable to suggest they will continue to decline in 2019, which might upset Playtechs outlook.
So, after considering all of the above, I would avoid Playtech for the time being and invest my money in financial services group IG (LSE: IGG) instead.
Attractive opportunity
Thanks to new regulations aimed at curbing inexperienced investor losses in the spread betting and contracts for difference markets (CFD), City analysts are forecasting a 20% decline in earnings per share for IG this year.
The company isnt alone in this. Virtually all spread betting and CFD providers are expected to suffer from the regulation. However, as the sectors largest player, I think IG will come out on top. The groupssize and global diversification implies it should be able to shrug off the regulations and potentially capture market share from smaller peers.
The business has also recently been investing in other, more traditional investment products, such as share trading and it now offers ISAs for clients. These new initiatives should, in my opinion, help the group weather the storm and come out on top.
Based on the above, I think its worth buying shares in IG both for the groups income asthe stock yields 7.3%, and its growth potential. The shares are currently dealing at a highly attractive multiple of just 11.7 times forward earnings.
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