2 dividend stocks I’d buy and hold for the next five years

Every investor loves dividends but finding the market’s best dividend stocks is not easy. That’s why the top ones are worth their weight in gold.

Rank Group (LSE: RNK) is an excellent example. Today the company announced a 12% hike in its full year dividend payout alongside its full year results. For the period, pre-tax profit fell to £79.7m from £85.5m in the year ago period. On an underlying basis, however, pre-tax profit rose because last year’s figures were flattered by a £10m exceptional gain from the disposal of freehold buildings.

The operator of Grosvenor Casinos and Mecca Bingo is struggling to grow in the “challenging” UK retail environment. But the group’s online business is growing rapidly with its digital business reporting 63% growth in operating profit for the year. That’s compared to a 1% fall in like-for-like revenues offline.

Dividend growth 

It’s Rank’s dividend growth potential that really makes this company a great income stock. For example, the dividend payout is covered 2.1 times by earnings per share leaving plenty of room for growth and flexibility if earnings start to slide. City analysts believe the company will increase its payout further next year to 8.1p giving a yield of 3.6% of current prices.

Over the past four years, management has increased the payout by 59%, and if this trend continues for the next four years, I estimate shares in the company will support a payout of 11.6p by 2022, giving a dividend yield of 5% at current prices. 

With earnings per share of 16.1p predicted for the financial year ending 30 June 2018, even if Rank’s earnings per share do not grow over the next five years, a dividend of 11.6p is still realistic.

Falling sales 

Kingfisher (LSE: KGF) is sliding today after the company reported its second quarter results for the three months to the end of July. Like-for-like sales declined by 1.9%, or by 1.7% in constant currency terms. On a reported basis, total group sales increased 4%. Still, despite these downbeat sales figures management remains confident the company can hit City earnings targets for the next two years as cost-cutting and efficiency savings help improve margins. 

Analysts are projecting a 4% decline in earnings per share for the year ending 31 January 2018, but growth is expected to pick up in the year after with earnings expansion of 15% projected.

Plenty of cash for dividends

Just like Rank, Kingfisher looks to be an attractive long term income stock. The shares currently support a dividend yield of 3.5%, and the payout is covered 2.2 times by earnings per share. The per share payout is projected to rise 12% next year, and if the company hits City growth forecasts as expected, dividend cover will rise to 2.3 times. What’s more, the company had £641m of net cash on the balance sheet at the end of fiscal 2016, adding further support to the payout.

As well as the dividend, management is also returning cash to investors via a £600m share buyback. So far, £368m of this total has already been returned and considering the group’s healthy cash generation, when the current plan is completed I would not rule out further cash returns.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Hikma Pharmaceuticals plc’s pain could be GlaxoSmithKline plc’s gain

Hikma Pharmaceuticals

Hikma Pharmaceuticals (LSE: HIK) today downgraded its 2017 forecast for the third time this year and now expects revenues of around $2bn, down from previous guidance of $2.1bn-$2.2bn. The announcement of a licensing agreement with Takeda couldn’t prevent the shares from plummeting 9% in early trading, knocking the share price down to nearly half what it was just 12 months ago. 

The company was hit by the devaluation of the Egyptian pound and an increasingly tough environment in the US where “competition is increasing and pricing pressure is intensifying,” according to CEO Said Darwazah.

First-half revenue rose 1%, while operating profit fell 7% after a strong performance in Generics was offset by a weaker showing from Branded Generics. Strong operating cash flow helped the company reduce net debt from $697m to $633m, a perfectly healthy level considering the defensive nature of pharma companies.

Investors will surely be disappointed, but some cautiously optimistic comments regarding Hikma’s Advair generic will go some way to soothing long-term fears. Sales of Advair, GlaxoSmithKline’s (LSE: GSK) premier blockbuster drug, have held up better than expected since its patent expired back in 2016, because the Diskus delivery system it employs has been a tough one to crack for both Hikma and rivals Mylan and Novartis alike.

Hikma said it has managed to “clarify and resolve” a number of the FDA’s questions regarding the key drug and reiterated there were “no material issues” concerning eventual approval. A more detailed update has been promised, but given the deterioration in the company’s outlook, investors might not relax until more context has been given.

These delays are certainly to the benefit of Glaxo. Its massive 5.3% yield is barely covered by cash-flow and the extended no-competition period for Advair grants some much-needed breathing space so it can squeeze more out of its other businesses.

Right direction

I firmly believe that GSK is moving in the right direction and that a combination of margin expansion and slow-but-steady sales growth will eventually better cover the dividend. If this happens, it would not be surprising to see the shares re-rate to a more normal yield of around 4.5%, indicating a near 20% upside if the market gets comfortable with the payout.

The company’s free cash flow jumped from £0.1bn in the first half of this year to £0.4bn, but if it is to achieve its target “to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x,” it must continue its run of form.

The rate of inevitable decline in Advair sales will be key for GSK over the next few years, as will performance in its HIV division which has really picked up the slack for the company of late. The firm did warn of “the impact of generic competition to Epzicom/Kivexa,” so investors would do well to keep a close eye of the performance from the HIV treatments in future updates.

I find both companies attractive propositions at current prices. Hikma has had a terrible year, but its strong presence in North Africa and the Middle East should continue to drive growth as healthcare spend increases. Similarly, Glaxo might run into some short-term issues covering the dividend, but its pipeline looks bright and I’m cheered by new CEO Emma Wamlsley’s strategic plan, specifically regarding a refocusing of capital allocation in the pharma business.

That said, I’d understand if readers were put off by the competitive pressures at both businesses. Those searching for safety may be better served seeking out similarly defensive companies that aren’t experiencing immiediate pressures. Our analysts have found five companies with resilient payouts and tremendous track records that could help you glide to retirement. To read the investment theses behind these quality companies, click here.

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Zach Coffell owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

2 high-growth funds thrashing the market right now

Hand holding a lit globe

Most Foolish investors build their portfolios around individual stocks and shares, but there is nothing wrong with adding a few high performing funds to the mix. Here’s a couple reporting today that may have slipped your attention, but merit a closer look.

APAX predator

Closed-ended investment trust APAX Global Alpha (LSE: APAX) invests 59% of its money in global private equity funds run by Apax Partners, which manages more than €40bn in total across its operations, and the remaining 41% in a tailored mix of derived investments. Roughly two-thirds of the fund is invested in the tech & telco and services sectors, with the remainder in healthcare and consumer. This £729m trust is 48% invested in the UK, 31% in Europe, 10% in India, 4% in the UK and 2% in China.

Recent performance has been strong, with the fund up 17% in the past 12 months, on top of a yield of 5.44%. However, today’s unaudited interim results for the half year ended 30 June disappoint as currency headwinds halted recent strong growth. 

Naff NAV

APAX Global Alpha posted a negative total net asset value (NAV) return of 0.7%, as the euro strengthened 8% against the US dollar. On a constant currency basis, NAV growth was positive at 4.2%. Adjusted NAV fell by €30.6m to €908.1m, due to adverse FX movements and the 2016 dividend payment of €23.8m. 

Apax Global Alpha chairman Tim Breedon said the portfolio continues to demonstrate strong fundamentals despite the setback. “Due to FX headwinds, the headline performance was weak however the outlook is positive as AGA’s Investment Adviser continues to realise value in a relatively young portfolio and is finding investment opportunities against a challenging market back drop.” That may be true but performance looks even more underwhelming when I compare it to one of my favourite global investment companies, Scottish Mortgage Trust, which recently delivered a 38.1% rise in NAV.

India calling

I have done well from my stake in Jupiter India, which is up 20% over the past 12 months, and 158% over five years, according to Trustnet. However, I would have done even better with India Capital Growth Fund (LSE: IGC) which is up 29% over the past year, and 160% over five. The investment trust has just published its interim results for the six months to 30 June with the highlight a 23.8% leap in NAV to £124m, giving net gains of £24m. Now that’s how to do it, APAX.

The share price increased by 27.7% to 93.25p over the year, while its two largest holdings, Dewan Housing and Federal Bank, soared 79.4% and 68.8% respectively. The AIM-quoted company is now seeking a listing on the main London market.

Discount delight

A rising tide is lifting all funds and India has been boosted by Prime Minister Modi’s reform agenda, which continues to attract investors, including strong overseas inflows of $8.5bn and another $3.3bn from domestic mutual funds. Still, you have to catch that tide, and India Capital Growth’s certainly did that.

Interestingly, it still trades at a whopping discount to NAV of -19.75%. If that hasn’t narrowed after recent successes it may never do so, but it does offer protection against further widening. If you believe the India tide can rise even higher, this fund could be a good way to ride it.

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Harvey Jones holds units in Jupiter India but has no other position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Do economic moats really impact on stock prices?

One aspect of investing which is often overlooked is the subject of economic moats. That is, a company’s competitive advantage over rivals which operate within the same industry. Certainly, many investors are aware of what an economic moat is. However, they may choose to focus to a greater extent on valuations, growth prospects and financial strength. While all of these areas are also worthwhile considerations when investing, a company’s economic moat could prove to be even more crucial in the performance of its shares in the long run.

Impact on risk

While all companies come with a degree of risk, those with wide economic moats tend to have reduced risk compared to their sector peers. This is because they usually have an advantage of some sort which translates into more consistent and robust profitability during difficult periods where trading conditions are more challenging.

For example, a company operating within the mining sector may have an economic moat in the form of lower costs than its rivals. This could mean that if commodity prices fall so that margins are squeezed, the company in question may be able to deliver stronger cash flow. This can then be used to reinvest in new assets or in existing ones in order to generate higher profitability further down the line.

The effect of this on a company’s valuation can be positive. Investors may be willing to place a premium valuation on companies which have greater defensive qualities due to the presence of a wide economic moat.

Impact on return

Similarly, a wider economic moat may also lead to higher profitability in the long run. Clearly, companies with narrow economic moats can generate high profitability, but this may not allow them to maximise their returns to the same extent as a rival with a wider economic moat.

For example, a company which has a high degree of customer loyalty from owning one or more strong brands may be able to generate higher profitability than a rival selling generic goods. The company with high brand loyalty may be able to charge more for an item which has the same cost to produce as a generic, thereby maximising margins for the company with a wide economic moat.

Over time, this can lead to a number of improvements for the business, such as a greater ability to pay dividends, lower debt levels and scope to expand into new territories with the same business model. This can lead to a higher share price in the long run.

Takeaway

Clearly, there is more to investing than solely seeking companies with wide economic moats. However, they can have strong effects on the risk/reward ratio of a business, and can lead to higher valuations as a result. Therefore, for investors who intend on holding shares through the economic cycle in particular, buying stocks with wide economic moats could be a shrewd move.

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This falling knife could be well worth catching

capital drilling

When a knife starts falling, it can have a surprisingly long way to fall. Even signs of a turnaround won’t persuade investors to risk their fingers. But there are big rewards for those who get their timing right.

Driller killer

Capital Drilling (LSE: CAPD), which provides drilling teams and equipment to mining operations in emerging and developing markets, has plunged since its shares peaked at 66p in January. Today, it trades at just 40p. I reckon this could be a buying opportunity because despite recent slippage the company’s results have been heading in the right direction this year.

Investors were cheered by news in February that Capital Drilling had cut its after-tax net loss from $10.2m to $4.8m, with revenues rising 19% to $93.4m. Last month, its half-year trading update trailed a substantial 49% year-on-year rise in revenues to $62.3m, marking its strongest first half since 2013. However, that hasn’t stop the share price from trailing away in recent weeks.

Capital return

Capital Drilling, which has a market cap of £52.07m, published half-year results for the period to 30 June this morning, with the positive news that it has now swung back into profit. This was primarily driven by a 40% increase in fleet utilisation rates to 56% year-on-year, with the average revenue per operating rig jumping from $175,000 to $191,000. Revenues bounced 49.04% from $41.7m to $62.3m, while EBITDA was up 59% to $11.6m. Net profit after tax was $2.6m against a loss of $0.8m last time.

Executive chairman Jamie Boyton hailed its improved fleet utilisation rate, revenue and profit growth, which he said were underpinned by improved market conditions: “While the initial uplift in activity was associated with predominantly gold and speciality metals companies, this has broadened over H1 2017 with an improving outlook in industrial metals, particularly copper.” 

Gold mining

Boyton said that capital markets continue to underpin junior miners and explorers, supporting increased exploration and development expenditure, while the company was boosted by two new long-term contract wins at the Tasiast Mine in Mauritania and the Syama Mine in Mali. 

However, he warned that legislative changes in Tanzania are causing concern and uncertainty, which may impact exploration and investment in the country “for the foreseeable future.” Although this is consistent with previous guidance, this may explain the lukewarm market response to today’s otherwise upbeat results.

Cash flows

The share price is down 2.53% at time of writing, as the results fail to revive recent waning investor enthusiasm so far. However, I can see plenty of positives to dig into, with Boyton reporting the firm in excellent financial health and generating solid free cash flow. “This strong cash generation, coupled with enhanced discipline around capital expenditure, has seen the Group end the period with net cash of $3.3m,” he said.

Capital Drilling has declared an interim dividend of 0.5 cents per share for the first half, up from 1.5 cents last year. This is a small company in a risky area, but with City analysts forecasting a 19% rise in earnings per share in 2018 this falling knife looks tempting.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

2 FTSE 250 stocks I’d dump today

Mining truck underground

Since the end of 2015, shares in KAZ Minerals (LSE: KAZ) and Antofagasta (LSE: ANTO) have charged higher as sentiment towards the mining sector has improved. Indeed, over the past two years, shares in these two miners have risen by 660% and 87% respectively excluding dividends.

But after this impressive run, I believe it could now be time for investors to turn their backs on these companies and take profits. 

Fizzling out

Kaz’s run since the end of 2014 has made the company one of the best-performing stocks in the mining sector, and it’s easy to see why. The company’s fundamentals have improved dramatically over the period and the firm’s first-half results for the six months ended 30 June confirm that this trend is continuing. 

Today the company reported that during the half, gross revenues increased 2.3 times to $873m while earnings before interest tax depreciation and amortisation increased 273% to $429m. Operating profit hit $291m, up 330% year-on-year. Rising profitability allowed the company to pay down $227m of debt during the period taking net debt to $2.4bn or around 2.8 times EBITDA. Management is expecting debt to fall further in the months ahead. 

For the full year, City analysts are expecting the company to report a pre-tax profit of £305m, which works out at 55.6p per share giving a valuation of 11.6 times forward earnings at current prices. This valuation isn’t particularly demanding, and analysts have pencilled in further earnings per share growth of 34% for 2018.

However, while shares in Kaz might look attractive based on current City estimates, the company’s earnings are still subject to the whims of the copper market, and there’s no guarantee copper prices will remain supportive for the next two years.

So, even though Kaz’s fundamentals are improving, and shares in the company might rise further from current levels, booking profits after a gain of more than 600% seems prudent.

Not worth the money 

Kaz looks cheap compared to the company’s current and projected growth. Shares in Antofagasta on the other hand, look anything but.

Antofagasta is one of the most expensive miners trading on the London market. At a forward P/E of 23.8, the shares support a valuation that is more suited to a high growth tech company, than a Chilean copper producer. Granted, analysts are expecting the company’s earnings per share to grow by 45% 2017, but even after accounting for this growth, it’s difficult to justify the group’s high valuation.

Just like Kaz, Antofagasta’s profits are dependent on copper prices, so income is volatile. If copper prices suddenly lurch lower, Antofagasta’s high valuation will come back to haunt the company as it’s likely the shares will suffer more than the rest of the sector as the company’s earnings growth evaporates.

Still, the one thing to like about Antofagasta is the company’s dividend payout. At the time of writing, analysts are projecting a dividend payout of 14p per share for 2017, giving a yield of 1.6%. Based on current earnings projections, this payout is covered 2.7 times by earnings per share, leaving plenty of room for payout growth or special dividends. Unfortunately, this dividend potential isn’t enough to convince me that investors should hold on to the company. 

Time to sell?

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

2 tech growth stocks that could make you rich

Roulette wheel

Forget all the talk about the world being in the middle of a tech bubble, this isn’t 1999. Technology plays a more integral part in our lives than ever, and real companies are making real money. The following two tech-based stocks have struggled in recent months, but they could make you rich in the longer run. Recent setbacks could make a handy entry point.

Stay Focused

Micro Focus International (LSE: MCRO) has plunged sharply from its 52-week high of 2,675p, and is currently trading at 1,945p. Investors are increasingly anxious over next month’s proposed $9bn purchase of HP Enterprise’s software business,which will lift the company’s debt to a nerve-frazzling 3.3 times EBITDA. Nerves were further frazzled by last month’s news that Micro Focus had presided over a 15% fall in its second half licenses and earnings.

HPE itself then reported poor licence sales, so it began to look like one troubled company trying to purchase another, doubling down on risk. However, I think the worry has been overdone. Playtech’s overall business looks stable, with guidance for the first six months of 2018 expected to be steady. The HPE deal still makes sense, given the lack of product overlap, plus the opportunity for cost savings and higher cash flows. Recent dips in licence sales may prove shortlived, and will also make it easier for management to beat these performance comparatives next year. 

Software, hard profits

Micro Focus International, which has a market cap of £5.05bn, trades at a forward valuation of 15.8 times earnings, which is relatively low by its recent standards, and yields 3.3%, covered twice. Operating margins of 31.7% add to the investment case. Forecast earnings per share (EPS) growth of 30% in 2018 also attract.

Management has built a solid business on squeezing efficiencies out of mature software schemes and HPE should continue the trend. Micro Focus is a three-bagger over the past five years, one that I believe retains scope for further strong gains.

Play the game

Online gaming specialist Playtech (LSE: PTEC) has also delivered over the long term, its share price is up 160% over five years, although it has also hit a run of bad form lately. However, the FTSE 250 company’s prospects remain promising, as it gains market share in live casino games and sports-betting, helped by its recent acquisition of BGT. Management also has a strong M&A track record, which should help it create further value.

This £3.11bn company’s prospects look strong, with a forecast 23% growth in EPS in 2017, followed by another 11% in 2018. Revenues are expected to grow sharply while the forecast yield of 3.5% is nicely covered 2.2 times, making this an attractive growth and income play.

Tech boom

Playtech’s lacklustre share performance over the past year could also prove a buying opportunity, with the stock trading at a forward valuation of just 13.3 times earnings. Operating margins and return on capital employed are both just over 41%, which impresses. This company generates plenty of cash and has a strong balance sheet to boot. Long-term wealth investors may want to give it a spin.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. 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.