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Think Monadelphous Group Ltd’s 12.7% yield is a bargain? Think again

Mining services company Monadelphous Group Limited (ASX: MND) could see its share price hammered today, after reporting a 27.8% fall in net profit although shares were up 3.5% at the open.

The company had guided to a fall of between 15% and 20%, and the market doesn’t like surprises – particularly lower profits than guidance.

But some investors might be tempted to jump on board if the share price sinks today given the company’s full-year dividend of 92 cents, which equates to a yield of 12.7% at a share price of $7.25.

What investors need to realise is that dividends per share fell 25% from the previous financial year, following earnings down, and it’s highly likely that dividends in 2016 will be lower than this year again.

This is the third consecutive year of falling earnings and dividends, and it’s not going to get any easier in the year ahead.

As Monadelphous says (emphasis mine):

  • Australian market conditions are expected to remain soft
  • Customers will continue to focus on reducing operating expenditure, improving productivity and restraining capital expenditure.
  • Margins will remain under pressure as competition is high for a smaller pipeline of work.

And this is the problem facing all mining services companies. As a result, many are diversifying their business into other sectors. Monadelphous acquired Water Infrastructure Group in December 2014, as it looks to move into the water sector. Just four days ago, RCR Tomlinson Limited (ASX: RCR) acquired the Water Corporation of Western Australia’s Engineering and Construction Services business, as it too seeks to diversify.

No doubt more contracting and engineering companies will be chasing better returns in other sectors, as resources and energy sector work continues to decline.

Foolish Takeaway

2016 and even 2017 looks set to be tough years for mining services, with forecaster BIS Shrapnel predicting capital expenditure to fall over the next two years in both the resources and energy sectors. Monadelphous – and other mining services companies – might look attractive at current prices, but could be value traps rather than good value.

 

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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