A FTSE 100 income star yielding 5% I’d sell to buy this dividend growth stock

Rupert Hargreaves — Tue, 28 May 2019 09:39:53 +0000

With its 4.8% dividend yield, robust reputation as one of the UK’s leading wealth managers, and a track record of growing its dividend payout to investors by an average of 25% per annum for the past six years, St. James’s Place (LSE: STJ) has all the hallmarks of being one of the best income stocks in the FTSE 100.

However, a better buy for a portfolio could be AFH Financial (LSE: AFHP) and today I’m going to explain why I believe St. James’s Place’s time in the sun could be coming to an end.

Record performance

On the face of it, St. James’s looks as if it is firing on all cylinders. At the end of April, the company reported that after a strong first quarter, funds under management had reached an all-time high of £103.5bn at the end of March, up from £95.6bn at the end of 2018. Net inflows of £2.2bn and net investment gains of £5.8bn helped power the business to this record level.

Commenting on the numbers at the end of April, chief executive Andrew Croft said, “There remains both a growing market for trusted face-to-face advice in the UK and an advice gap that represents a major opportunity for us.“

The growing market also presents a substantial opportunity for AFH Financial. Today the company reported that for the six months ended 30 April, funds under management increased 68% to £5.4bn, boosting revenues and statutory profit after tax by 61% and 80% respectively.

Management believes this is just the start of the group’s growth. It is targeting assets under management of £10bn within three to five years, growing revenues from £37m to £140m at the same time.

A key advantage

These may seem like unrealistic targets for this relatively small wealth management group, but the company has one key advantage over its larger competitor that I think will help it achieve its aspirational objectives; lower fees.

Towards the end of the last year, AFH decided to scrap its annual platform fee for new clients. The company is also committed to reducing costs for clients over time as it accrues more assets and can achieve economies of scale. In comparison, St. James’s charges an eye-watering 4.5% of savers’ initial investment, which will “be used to pay for initial advice” with a further annual fee of 0.5%, that’s excluding product charges of around 1% per annum.

Some analysis suggests clients could be paying as much as 7.14% in fees every year to St James’s. These fees go some way to explaining why it was one of the most complained about wealth managers in the UK last year.

Better value for money

If AFH continues to offer clients a cheaper alternative, then I think the stock is worth backing for the long term as it continues towards its growth objectives. What’s more, even though it might not offer the same level of income, the stock is currently dealing at a forward P/E of just 10.2, compared to26 for St. James’s.

Based on these numbers, AFH looks to me to offer better value for both investors and clients alike.

The post A FTSE 100 income star yielding 5% I’d sell to buy this dividend growth stock appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

These 2 small-caps could become dividend champions

Rupert Hargreaves — Tue, 28 Aug 2018 10:10:49 +0000

If you want to make the most money from investing, the trick is to buy shares before the rest of the market catches on to their potential. Today, I’m looking at two small-caps that have the potential to be future dividend champions. It could be the time to buy-in now before it’s too late.

Follow the money

Manufacturer of laser-guided construction equipment Somero Enterprises (LSE: SOM) is an excellent example of the rule that boring businesses tend to make the best investments.

Over the past six years, its net profit has expanded at a rate of around 80% per annum! Thanks to this growth, shares in the company have more than quadrupled in value since mid-2013.

City analysts believe the group’s growth will slow over the next two years. Analysts have pencilled in an earnings per share (EPS) increase of just 17% for 2018 and 5% for 2019, a significant drop on the 80% per annum recorded between 2012 and 2017. Still, what Somero lacks in earnings growth, it more than makes up for in dividend potential.

The shares currently yield 3.9%, but this is expected to hit 5.5% by 2019. According to analysts, Somero’s per share payout will jump 42% by 2019. With $20m of net cash on the balance sheet, and dividend cover of 2 times (for 2017) it can easily afford this growth. And I believe it could be just the start of the company’s life as an income champion because its operating profit margin of 30% gives the firm plenty of free cash flow to play with every year. Even as growth slows, management can afford to hand more cash to shareholders.

As well as its dividend profile, shares in Somero currently trade at an attractive forward P/E of 12.5. So if you’re looking for a small-cap dividend growth play, in my opinion, this company is certainly worth a deeper look.

Market consolidator

Another company that looks to have all the makings of a future dividend star is financial services firm AFH Financial (LSE: AFHP).

AFH is still in its early growth stages. For 2018, City analysts are forecasting EPS growth of 87%. An increase of 15% is projected for 2019. However, at this point, I believe the figures for 2019 are conservative because AFH is complementing its organic growth with acquisitions, consolidating the highly fragmented market of small wealth managers.

Over the past seven days, it has snapped up the client portfolios of HTH Group Limited, for £5.1m (dependent upon performance) and Harvey Curtis LLP for £2.6m. Both of these acquisitions are being funded from the group’s cash resources (£24m at the end of April).

As AFH continues to roll up smaller wealth managers, earnings should continue to multiply, building the foundations for dividend growth.

Today, shares in the firm only yield 1.5%, which isn’t that attractive in itself. However, the payout is covered four times by EPS, so there’s enormous scope for dividend rises. I reckon now could be the time to buy into this dividend growth story, before the rest of the market realises AFH’s full potential.

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