Should I Buy This Dirt-Cheap Stock to Start Earning Passive Income? A Deep Dive into Pets at Home
The UK stock market is soaring, and with it, the allure of cheap stocks for investors. One such opportunity that has caught my attention is Pets at Home Group Plc (LSE: PETS). Despite recent challenges, including a dividend cut and a regulatory investigation, there are signs of improvement that could make this a smart investment.
Why is Pets at Home So Cheap?
Pets at Home was once a dominant player in the UK pet and vet store market, but recent years have been tough. The retail side of the business has faced a tough economic landscape, with pet owners trading down to cheaper products, and the vet side has been spooked by a Competition and Markets Authority (CMA) investigation.
The latest results show a 1% drop in consumer revenue and a 57.8% slump in retail underlying pre-tax profit to £30.8m. However, the vet business is stronger, with a 5% sales increase and a 10% jump in underlying earnings to £83.8m. Despite a nearly 30% drop in overall earnings, the share price rose, indicating a potential turnaround.
An Incoming Turnaround?
The CMA investigation has concluded, and while it forced Pets at Home to change its approach, the impact was less severe than feared. With a surge in pet adoptions during the pandemic, many pets are now entering their second half of life, leading to increased health and care spending.
Management is actively improving its retail offer through price cuts, driving higher volumes and customer satisfaction. While this may hurt retail margins in the short term, it builds stronger customer relationships in the long run. The vet business is also scaling, offering a potential boost to earnings and dividends.
Is Now the Time to Buy?
Pets at Home now pays a 3.8% yield, which is not the highest, but it has the potential to grow. The risk is significant, but with signs of improvement and the regulatory cloud lifted, it might be worth considering. The stock's potential for earnings and dividend recovery makes it an intriguing investment opportunity.
Conclusion
While the stock may not be a screaming buy, the potential for a critical inflexion point and the possibility of dividend recovery make it an interesting prospect. With a yield that could grow over time, Pets at Home could be a smart addition to a portfolio, especially for those seeking passive income. However, investors should carefully consider the risks and potential rewards before making any decisions.
This article is an opinion piece and should not be considered financial advice. Always do your own research and consult a financial advisor before making investment decisions.
