I’d sell Lloyds Banking Group plc to buy this one dividend stock

Lloyds cashpoint atm

I believe Lloyds (LSE: LLOY) is one of the best dividend stocks trading in London today as I have written before here. The bank’s current dividend yield, coupled with its healthy capital cushion and strong cash generation all point to the conclusion that Lloyds is not only one of one of the best dividend stocks in the FTSE 100 today, but that the bank will also be able to grow its payout substantially in the years ahead.

However, while I think that Lloyds is one of the UK’s best dividend stocks, I also believe that every portfolio should have some exposure to international markets. After a decade of restructuring, Lloyds’ international presence has been chiselled away to almost nothing, and the company is basically a play on the success of the UK economy. This means that if the UK falls into recession, Lloyds’ earnings and dividend will suffer as a result.

Looking overseas 

Considering Lloyds’ domestic focus, I believe a top dividend stock with a broad international presence might be a better pick for those investors looking for more overseas exposure. Sagicor Financial (LSE: SFI) looks as if it could be a Lloyds substitute, and it would also sit well in a portfolio alongside the UK’s largest mortgage lender.

Sagicor is interesting because even though the company has a market capitalisation of £274m, it still flies under the radar of most investors. The company provides financial services across the Caribbean and in the US offering plenty of diversification compared to Lloyds. Growth in these markets has been attractive with pre-tax profit growing by 40% between 2013 and 2016 as revenue has remained relatively constant.

And because Sagicor flies under the radar of most investors, the financial services company’s shares are cheap. At the time of writing, the shares trade at a trailing 12-month P/E of 4.9 and price-to-tangible book ratio of 0.6. Such a deeply discounted valuation makes this stock difficult to pass up. Moreover, the shares currently support a dividend yield of 4.4% and there’s plenty of room for payout growth with the dividend covered nearly four times by earnings per share.

Why the low valuation? 

The question is, if the company has been able to achieve such astounding growth, why is Sagicor so cheap? 

It looks as if investors are avoiding the company just because it flies under the radar and has exposure to frontier markets in the Caribbean. For adventurous, high-risk investors this could be the perfect opportunity to bag an undervalued financial stock with an attractive dividend yield and international exposure, as well as a history of steady growth. 

These traits could make Sagicor the perfect sidekick to Lloyds in a portfolio but I do not think the company can replace Lloyds entirely.

Even though Sagicor might have better growth prospects and international diversification, there’s no denying that Lloyds’ size and scale gives it a huge advantage over the smaller firm. Still, the two might complement each other nicely in a portfolio if you’re willing to take on the extra risk.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Porter’s Five Forces can help you achieve financial independence

Investing in the FTSE 100

We’re big advocates of a bottom-up approach here at The Motley Fool. We invest in individual companies instead of betting on sectors. This approach can help us ignore the relentless ‘noise’ of the market, but taking this approach too far can be dangerous too.

Companies do not exist in isolation and do not have complete control over their destiny. It is therefore important to consider the impact market forces could have on an investment candidate. Michael Porter, a professor at Harvard, has designed a model of analysis that helps us investigate how a company functions inside its industry. 

Porter’s Five Forces provides insights into how the competitive picture may impact sales and profitability at a given company in the future. 

Force number one asks: How easily can another company enter this industry”

Threat of new entrants

Industries with relatively few players often boast outsized returns on capital. Investors will always be drawn to such industries, but unless a company has a wide economic moat (or durable competitive advantage) new competitors will inevitably emerge, vying for a cut of the juicy profits. This increased competition erodes margins until return on capital reverts to the mean. Investors who bought in at its zenith will be left nursing nasty losses. 

To avoid this fate, don’t be drawn in by big margins. Instead ask yourself how easy would it be to recreate this business if money was no object. If you could create a viable rival without in-house knowledge, hard-earned customer relationships, regulatory approval, brand-building, patent approval or any other differentiator, the company in question likely has a weak competitive position. 

Threat of substitutes

The force of substitution is the threat of customers choosing a different product over yours. Driverless cars might substitute taxi drivers. One engine part may be interchangeable with a competing product. When analysing a product, ask: what might be substituted for this? If a service or product is differentiated and strong enough that it has few threats of substitution, it could have the potential for outperformance.

Bargaining power of customers

In industries where competition is rife, the balance of power often shifts towards the customer base. This can result in price-sensitive consumers, minimal brand loyalty or even open the doors to price negotiations, thus reducing profitability. 

Bargaining power of suppliers

When there is both bountiful supply and suppliers, a company can tend to source its inputs more cheaply because of increased competition. However, if a company must buy a special chemical that is only made by one supplier, it has little scope to negotiate on price if there are few or no viable substitutes. 

Industry rivalry

Who are the other big players in the candidate’s industry? What are they good at? Where do they fall down? Do they have any distinct differentiators? Can they threaten the candidate in the future? Understanding how your candidate compares to peers is or paramount importance to forming an opinion on its future. 

Understanding these forces could help you track down the not-so-obvious big winners of the future. Our analysts often use this approach to find growth candidates that can compound outsized returns over the long run. We’ve found a company that ticks all the boxes. 

People will pay top dollar for its world-renowned brand, its raw materials are plentiful and cheap and it has a wonderful growth record. This British growth story has doubled profits since 2012 and shows no sign of letting up yet. To read the investment thesis in full, click here

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Two dividend growth stocks I’d buy today

Crest Nicholson

Today I’m looking at two stocks that have increased their dividend payouts significantly in recent years. Despite the strong dividend growth, neither stock looks particularly expensive right now.

Crest Nicholson

Over the last four years, housebuilder Crest Nicholson (LSE: CRST) has been a dividend growth investor’s dream, paying out dividends of 6.5p, 14.3p, 19.7p and 27.6p. With analysts forecasting a payout of 34p for FY2017, a huge yield of 6.3% could be on offer.
 
Often, when a yield is that high, it’s worth approaching with caution, as it could be a signal from the market that a dividend cut is on the horizon. However Crest Nicholson released half-yearly results on June 13, and there was no reason to believe that the dividend might be in danger any time soon.
 
Revenue for the six months to the end of April increased 3%, profit before tax rose 5% and basic earnings per share jumped 5%. Furthermore, the housebuilder hiked the dividend by an impressive 23% to 11.2p, a signal of confidence from management. The company stated that “the outcome of the UK General Election may introduce some uncertainty in the short term but we expect the new-build housing market to remain robust.” 
 
Crest Nicholson’s share price has pulled back around 15% since mid-April, and at the current level of around 540p, leaves the stock trading on an amazingly low P/E of around eight. So what’s the catch here?
 
Well, investors should bear in mind that housebuilding is a cyclical business, and in the event of a significant economic downturn or collapse in the property market, profitability at Crest Nicholson could suffer and the dividend could be at risk. Perhaps the market believes that we’re nearing the top of the cycle.
 
However, with dividend coverage of 2.25 times last year, and sales of £540m in the pipeline, I think there could be further room to run, as the company has said it is “well positioned to continue to deliver strong operational and financial performance in the medium term.” 

WPP

Another company that has seen its share price drift lower recently is WPP (LSE: WPP). The advertising giant warned in March that global economic and political uncertainty may lead to a slowdown in growth this year, and its shares have slumped from above 1,920p to around 1,660p as a result. 

Buying high-quality companies when they’re a little out of favour can be a rewarding strategy in the long term, and I reckon the 14% slump in the share price might have provided an interesting opportunity. That’s because WPP has an excellent dividend growth history and in the last three years alone has increased its dividend payout from 34.2p to 56.6p, a compound annual growth rate (CAGR) of 18%.
 
Although revenue is forecast to fall 6% this year, analysts still expect a dividend increase of around 11%. That would take the dividend payout to 63p per share, a yield of around 3.8% at the current share price. On consensus FY2017 earnings forecasts of 126.3p per share, WPP trades on a forward-looking P/E ratio of 13.2, which I believe is relatively good value for a stock with the track record of growth that WPP has.

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Edward Sheldon 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.

Why being a contrarian investor could boost your returns

The stock market is generally in a period of either optimism or pessimism. That’s why the terms ‘bullish’ and ‘bearish’ are often used to describe market sentiment. Another way of doing so could be to describe investors as either fearful or greedy, since the dominant emotion of the two can lead to major share price gains or losses in a relatively short period of time.

Of course, all investors wish to buy ahead of a more bullish period of time for the stock market, and sell prior to a more bearish period. Doing so can be tough, but by being a contrarian investor it is possible to use changes in market sentiment to your advantage.

Going against the herd

Clearly, to buy at a low ebb for the stock market and sell at a high point requires an investor to go against the dominant emotion of the wider market. Share prices are rarely low without good reason. This could be because of a recession, industry challenges or internal problems which are hurting a company’s financial outlook.

In such a scenario, most investors will sell up and deem the risks to be too great given the potential rewards. However, contrarian investors would instead go against the investment herd and buy the company in question. Doing so can lead to a period of disappointment and paper losses, but in the long run it can lead to a relatively high total return.

It’s a similar story when selling shares. Market optimism may be high and it may seem as though the current Bull Run will never end. However, no asset price has ever risen in perpetuity, so selling when other investors are optimistic could allow an investor to lock-in profits at the most lucrative point in the investment cycle.

Investor mind-set

As highlighted, being a contrarian investor can be tough. It usually means an investor is wrong for at least a period of time, since it is tough to call the exact top and bottom of a market. This is where a long-term outlook can prove to be extremely helpful, since it can mean greater patience on the part of the investor. Furthermore, focusing on the history of the stock market shows that even when there are major problems facing it which seem insurmountable in the short run, in the long run major stock markets have always recovered to post higher highs.

Clearly, obtaining the right mind-set is easier said than done. Some investors will inevitably find it more straightforward than others to buy when other investors are selling and vice versa. However, by doing so it can be possible to find the most opportune moments to buy and sell shares, which could then lead to higher total returns in the long run. As such, being a contrarian investor may not always be fun or exciting, but it can be hugely profitable over a multi-year period.

Growth opportunity

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The company in question offers a potent mix of growth and a relatively enticing valuation. It could outperform the wider index and boost your portfolio returns in 2017 and beyond.

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These great growth stocks have much further to go

Up graph with bar charts

FTSE 250 pharma play Dechra Pharmaceuticals (LSE: DPH) has proved a stellar performer so far in 2017.

Dechra has gained 35% in value, the company hitting peaks above £19.50 per share in the process before settling lower more recently. However, I see this mild reversal as a temporary pause for breath and an opportunity for dip buyers to pile-in, and particularly for those seeking hot growth stocks .

City brokers expect Dechra to have put the pedal to the metal and generate earnings growth of 45% in the year to June 2017, up from the 7% advance generated last year. And an extra, meaty 16% rise is anticipated for fiscal 2018.

A forward P/E multiple of 24.9 times may appear a tad heady at face value, soaring above the widely-considered value benchmark of 15 times. But I reckon a stock of Dechra’s quality deserves such a premium.

Medical marvel

Through an aggressive strategy of clever acquisitions and licensing deals, Dechra has established itself as a major global force in the animal care market for both pets and farm animals.

The company made further steps in March when it announced it had inked a licensing deal with Australia-based Animal Ethics to sell the Tri-Solfen product in all geographies barring Australia and New Zealand. The drug is administered to anaesthetise, relieve pain, control bleeding and battle infection during routine treatments in livestock.

And at the same time, Dechra announced that it had acquired 33% of the share capital of Medical Ethics for $18m, the parent company of Animal Ethics.

With the balance sheet robust enough to facilitate more action on the M&A front, and recent purchases also boosting the company’s exciting product pipeline, I reckon Dechra has what it takes to deliver stunning returns in the years ahead.

Major glazier

Tyman (LSE: TYMN) is another brilliant growth stock enjoying brilliant momentum — the door and window builder has risen 33% since the bells rang-in New Year’s Day, and it topped out at a record peak above 365p per share on Friday.

Like Dechra, Tyman has been engaged in lively acquisition activity in recent times, with the acquisition of Giesse and Bilco in particular bolstering the company’s position in Europe and North America respectively. And solid economic growth in these territories looks likely to fire demand for Tyman’s products soundly higher.

The number crunchers certainly expect Tyman’s long-running growth story to continue, and expansion of 10% and 8% is anticipated for 2017 and 2018. Consequently the business trades on a forward earnings multiple of 13.2 times, a figure that can be expected to support further share price advances should — as I expect — trading continue to impress.

Tyman advised last month that it has got off to “a solid start” so far in 2017, with revenues rising 31% from the beginning of the year to May 12, thanks to the impact of sterling weakness and sales generated from recent acquisitions. And investors can expect the top line to pick up the pace once the seasonal quietness in its Northern Hemisphere markets draws to a close.

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Royston Wild 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.