Market-beating growth champion

DS Smith (LSE: SMDS) is one of the London market’s best-performing stocks. The last time I covered the company, at the end of June, I calculated that the stock had produced a total return for investors of 28.5% per annum over the past five years. Since then the stock has gone on to add another 10% excluding dividends. 

A trading update issued by the company today accounts for some of these gains. 

Trading for the first half has been in line with expectations with “very strong” volume growth. Meanwhile, the group’s  return on capital employed is in the upper end of the target range. 

Group Chief Executive Miles Roberts said: “We are pleased with the consistently strong organic progress of the business. Customers continue to demand high-quality, innovative packaging on a multi-national basis and we have the scale and expertise to serve them.”

The company also said that the integration of US East Coast-based Interstate Resources Inc, which was acquired mid-year, is apparently going to plan and to help boost growth further, in mid-October DS announced the acquisition of EcoPack and EcoPaper in Romania. 

Investor returns are key  

As well as serving customers, DS is also serving its investors well. Gains of 25%+ per annum are some of the best around and even after this performance, the shares are not particularly expensive. 

Shares in DS currently trade at a forward P/E of 15.1, falling to 13.7 for the fiscal year ending 30 April based on current City forecasts. This valuation does not look particularly demanding to me, especially as the company continues to invest in growth. I believe the company can continue to achieve double-digit annual returns for investors for the next decade as growth continues. 

Explosive growth 

DS isn’t the only company that’s managed to achieve double-digit returns for investors over the past five years. Manufacturer of external building parts Alumasc (LSE: ALU) has seen its shares return 19.4% per annum for the past five years as earnings per share have nearly doubled. 

Alumasc’s returns have come from a combination of both growth and dividends. As earnings per share have grown steadily, management has distributed a large portion of income to investors. The result is that its owners have received a double-digit annual return. 

It looks as if this is set to continue. Right now the shares support a dividend yield of 4.6% and City analysts are projecting earnings per share growth of 7% for the year ending 30 June 2018. Assuming the company’s valuation does not increase, according to my figures, the combination of growth and income will produce a return of 11.6% for investors. 

However, it’s also possible the shares could re-rate to a high valuation. At present, shares in Alumasc are trading at a forward P/E of 7.7 compared to the sector average of 9.3. 

The post Two growth bargains I’d buy and hold for the next decade appeared first on The Twelfth Magpie.

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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has recommended DS Smith. 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.

Exceeding targets on investor income

Yet capital gains are only part of the story. During 2012, the firm set out what looked at the time ambitious plans for returning cash to shareholders as far ahead as 2021. I remember many were sceptical that the firm could see ahead with such accuracy. The doubters were right… on 27 February 2017, the directors announced another additional payment under the firm’s capital return plan of 25p per share, which cost the company £77m to service.

The extra payment lifted the total value of the plan to £2.85bn, or so, which works out at around £9.25 per share to be returned to shareholders by the end of 2021. That’s an increase of 49% over the firm’s original capital return plan from 2012. Persimmon is on course to blow its own targets out of the water! As well as capital gains, the company is delivering big on dividends. Wow!

More to come?

But I think there’s yet more to come from Persimmon. In a trading update this morning, the firm described its performance in the first half of the year as “excellent”. Highlights include legal completion volumes up 5% compared to a year ago, average selling prices 3.5% higher, revenue shooting up 12% and, in an indication that operational momentum remains robust, forward sales value at the mid-point of the year was 18% higher than the year before.

The economics of the sector have been favourable since 2008, of course, with demographics and affordable mortgages keeping demand high. However, Persimmon’s good trading has made the firm strong financially and the directors expect the company to navigate easily through the next economic downturn. I reckon the unpredictable effects of the firm’s inherent cyclicality keep the valuation down because we never know for sure when the next downturn will arrive. Nevertheless, a forward price-to-earnings (P/E) ratio running at just over 10 for 2018 and an annualised forward dividend yield of 5.4% keep the shares looking attractive.

Undemanding valuation

Meanwhile, premium building products, systems and solutions provider Alumasc Group (LSE: ALU) also sports an undemanding valuation. With the shares at 183p, the forward P/E rating sits at just over 8.5 and the forward dividend yield is a shade over 4%. City analysts following the firm expect earnings to lift 7% for the year to June 2018 and those earnings should cover the dividend payout almost three times.

We last heard from the company on 21 February when it announced a contract win. Back then, the firm’s order book hit a new high at £32.9m hard on the heels of a 17% rise in first-half revenues to £50.7 m, which the company proclaimed to be “well ahead of UK construction market growth.”  So Alumasc has been trading well but it is another cyclical firm tied to the fortunes of the construction market, a fact that is keeping a peg on the valuation in my opinion. Having said that, the dividend does look attractive. We’ll find out more with the full-year results due around 1 September.

The post 2 hot dividend shares I’d buy today appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

But that tasty price growth has been going hand in hand with rising EPS and dividends, so we’re not seeing a high valuation. Earnings rose by 50% between 2013 and 2016, while the dividend put on 44% in the same period.

Today, the shares are only on a forward P/E of around nine based on forecasts for the year to June 2017, dropping to 8.5 by 2018, and the progressive dividend looks set to yield 3.7% this year and 4% next. That looks cheap, so what’s the story?

The firm provides “premium building products, systems and solutions“, and there’s certainly some knock-on effect from the weakening sentiment towards the housebuilding sector. And the rising costs of imported raw materials since Brexit-driven inflation set in won’t have helped.

Premium segment

But I reckon a company doing such apparently good business in a healthy picks’n’shovels market, and which had net cash (of £5m) on its books at the end of December, deserves a better rating.

The group is actually more diverse than it might seem too, and encompasses divisions addressing solar shading and screening, roofing and walling, and water management, in addition to general housebuilding products.

At the interim stage, Alumasc had an order book to the tune of £27.6m, and chief executive Peter Hooper reckoned the firm’s “chosen specialist markets continue to benefit from one or more of the long-term strategic growth drivers of energy management, water management, bespoke solutions and ease of construction.“

Alumasc looks to me like a good one to stash away for your retirement.

Five-bagger

MJ Gleeson (LSE: GLE) shares have done even better, giving shareholders a five-bagger over five years. At 625p today, we’re looking at a richer rating than Alumasc’s, but not outrageously so. 

In fact, a forward P/E of 14 and forecast dividend yield of 2.9% are very close to the FTSE 100‘s long-term average, and 2018 predictions would improve those measures to 12.7 and 3.2% respectively. For a company that’s quadrupled its earnings in just three years and has further growth forecast, I rate that a bargain valuation.

Gleeson is an urban regeneration and strategic land specialist, so it’s also suffering from the malaise that’s lingering around the housebuilding business, but interim results looked positive.

Although pre-tax profit gained a modest 1.8% and EPS only 1.2%, the company’s net assets rose by 10.7% and cash flow of £8.6m led to a 175% rise in cash and equivalents. And net assets per share of 290p make the valuation of the business itself look attractive.

Chairman Dermot Gleeson told us the company is “confident of delivering a result for the full year in line with expectations,” so we’re likely to see modest earnings growth and a well-covered dividend.

Strongly progressive dividend

While a yield of only around 3% might not sound great, the annual cash handout has been growing way ahead of inflation and looks set to continue that way — if you’d bought shares five years ago at around 110p, you’d have locked-in an effective yield of nearly 18% on your purchase price.

I don’t see earnings growth continuing at anywhere near the breakneck pace of the past three years, but a steady 5%-10% per year looks plausible. Another good long-term buy, I think.

The post 2 growth-plus-income stocks that could boost your retirement wealth appeared first on The Twelfth Magpie.

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Alan Oscroft 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.

Alumasc’s sales increased by just 2% in the last financial year, but its order book as at 30 June was 11% higher than it was a year ago. This provides a bright outlook for the company and means that it could go on to record its sixth successive year of profit growth.

On the topic of profitability, Alumasc’s underlying earnings rose by 9% and this enabled it to raise dividends per share by 8%. This puts it on a yield of 4% and with dividends being covered three times by profit, there’s scope for a rapid rise in shareholder payouts over the medium-to-long term. The potential for this is set to be improved by Alumasc’s forecasts. The company is expected to grow its bottom line by 14% next year and with its shares on a price-to-earnings growth (PEG) ratio of 0.5, it offers growth at a reasonable price.

Size and scale

In fact, Alumasc offers superior value for money on this basis compared to Rolls-Royce and BAE. For example, the former has a PEG ratio of 0.6 while the latter’s is 1.7. Rolls-Royce’s PEG ratio benefits from the fact that it’s at the beginning of a period of major change, with a new management team set to deliver improved financial performance for the business following a disappointing run of results. For example, Rolls-Royce is due to record a fall in earnings of 56% this year which means that next year’s 34% expected rise in profit will leave it below 2015’s numbers.

In contrast, BAE remains a relatively solid business. It has been a dependable investment in recent years even though the defence industry has endured a difficult period as budgets across the developed world have been slashed. Its yield of 3.9% is behind that of Alumasc, but with BAE having a size and scale advantage over its industrial peer, it offers a lower risk profile.

Furthermore, its balance sheet is modestly leveraged and its cash flow indicates that it has the capacity to invest heavily for future growth. This may not allow it to keep pace with Rolls-Royce’s growth rate, but with BAE having a dividend covered almost twice by profit as well as a higher yield versus Rolls-Royce’s 1.6%, it offers the superior risk/reward ratio. And while Alumasc is well-diversified and has a sound business model, BAE’s track record of stable growth could appeal in what’s set to be an uncertain period for UK investors.

While all three stocks are worth buying at the present time, BAE offers the most enticing risk/reward ratio. Its mix of value, income, growth and stability make it stand out even against high quality industrial peers.

The post Will this industrial stock rise by 30%+ following today’s results? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Twitchy investors

Alumasc Group’s share price took a 22% dive recently when the building products supplier released its AGM statement on 22 October. Generally, the chairman’s comments were positive and upbeat about the firm’s operational and financial progress, but one little paragraph buried in the statement seems to have spooked investors. The chairman said,

” We have seen some evidence that capacity constraints within the construction industry generally have caused delay to some projects.  While this may have an impact on timing, we continue to believe that management’s expectations for the group’s full year financial performance will be achieved.”

The reaction of the shares goes to show how twitchy investors are about cyclical firms just now, at this arguably late stage in the general macro-economic cycle. Many are looking for the next occurrence of peak earnings with the cyclicals; you know, the one before profit and share-price collapse as we lurch into the terrifying plunge of the next down-leg.

Despite the weakness in Alumasc’s share price, I still like the story. The firm recently sold the larger of its two engineering products businesses to focus on its building products operations where the directors anticipate a better opportunity to drive growth.  Such re-invention and concentration of activities could augur well for future success. It’s usually more effective and profitable in business to do few things well than many things in a mediocre way. I wonder if this move by Alumasc could mark an inflexion point for the firm where accelerated growth might kick in down the road.

A potential fly in the ointment

Alumasc aims to focus on the construction industry, a sector with notorious cyclicality. By extension, Alumasc’s future profits and share-price movements will likely follow the fortunes of the construction sector. That’s a potential fly in the ointment of Alumasc’s ongoing growth story and a probable reason for the firm’s ostensibly low valuation.

At today’s share price of 175p FTSE Fledgling constituent Alumasc Group trades on a forward price-to-earnings (P/E) rating of nine and the forward dividend yield runs at 3.7%. City analysts following the firm expect 2016 earnings to grow 5% and cover the payout three times. The valuation looks tempting, but not if earnings crash in some macro-economic downturn — such is the judgement call we all need to make when investing in cyclical firms today.

What about the big firms?

Since the middle of 2012, Alumasc’s shares have been creeping up. The firm’s ongoing development as a focused building products supplier and niche market operator could help drive investor total returns higher than what we might achieve investing in the likes of undifferentiated cyclicals such as BP and Lloyds Banking Group.

The outcome for BP depends on what the price of oil does — a factor that the firm can’t control. A persistently low oil price changes the outlook for BP and I’m not one of those hoping for, or counting on, a recovery to previous highs in the price of oil. Therefore, to me, investing in BP is off the agenda; instead, I’m in favour of firms operating in sectors that might benefit from a prolonged period of lower oil prices. That’s why Alumasc seems attractive to me.

Lloyds Banking Group strikes me as a similar investment proposition to BP. Lloyds is a commodity-style business with products and services similar to those of its competitors. In order to thrive, Lloyds depends on a buoyant macro-economic environment. Growth seems set to be hard to achieve in the competitive banking landscape that prevails in Britain, and regulatory headwinds persist.

The post Are We Seeing A Golden Opportunity With Lloyds Banking Group plc, BP plc And Alumasc Group plc? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Although large in terms of their market capitalisations, neither firm produces much added value to their product offerings. Go to Royal Bank of Scotland for a bank account or a loan and we might as well go to any banking company; buy a ton of iron ore or copper from BHP Billiton and we could buy it from any producer (ignoring geographical limitations).

Cyclically challenged

These giants might feel safe because of their size, but their longer-term share price charts tell a story of disappointed investors.

Perhaps now, with the shares weak, Royal Bank of Scotland and BHP Billiton look attractive as cyclical bets on the next up-leg. Maybe. But there are better cyclical options on the stock market down the rankings with the smaller market capitalisations.

Rather than buying shares in out-and-out cyclical monoliths with undifferentiated products, maybe it’s better to look for a firm that adds more value to the final product it produces. That’s why I’m looking at premium building and precision engineering products supplier Alumasc Group (LSE: ALU).

Carving a focused niche

We happen upon Almunasc Group at an interesting period in the firm’s development. A trading update last month confirmed the sale of the larger of the company’s two engineering products businesses for £5.8 million in cash.

Alumasc plans to focus on its building products operations where the directors see the biggest opportunity to drive growth. I’m a big fan of concentration when it comes to business activities. Companies rarely outperform by trying to be all things to everyone. Trying to cover many sectors can dissipate energy, and a lacklustre business line can pull down overall trading results. By contrast, if a company focuses on a narrow area of operations there’s potential to become expert and efficient, which could lead to enhanced profitability.

To me, it makes sense for Alumasc to divest weaker areas of its business to do more of what’s going well. The firm’s recent business sale could mark an inflexion point from which future growth accelerates.

Serving the construction industry

Alumasc either manufactures or puts its name to a range of products serving the construction industry. Things such as blinds, louvres, balustrades, access covers, loft hatches, ventilation grills, water proofing and green roof systems, and external wall insulation rendering systems, to name but a few.

There’s no doubt that a large element of cyclicality will affect ongoing operations. The firm is nailing its colours to the mast of the construction industry, so we need to take a view on where that sector might be going over the next few years.

However, assuming that the next macro-economic crash isn’t imminent, Alumasc has opportunity to grow its niche operations within the wider cycle. The directors preferred route to expansion is by organic means, but they are not ruling out targeted acquisitions as well.

Valuation now

At a share price of 152p (market cap: £55 million) FTSE Fledgling constituent Alumasc Group trades on a forward dividend yield around 4.2%, and forecasters expect 2016 earnings to cover the payout almost three times. That level of cover suggests the directors are confident about achieving further growth, otherwise they’d probably hand the cash to investors rather than hanging on to it to reinvest in the business.

Meanwhile, the forward price-to-earnings ratio sits at just over eight, which seems undemanding when taken with that dividend payment and City analysts’ earnings growth predictions of 5% next year.

Alumasc’s shares have been trending up since the middle of 2012 — perhaps I’m not the only investor who thinks the firm’s ongoing development as a focused building products supplier and niche market operator could see the company outperform total returns from undifferentiated cyclicals such as Royal Bank of Scotland Group and BHP Billiton.

The post Why Alumasc Group plc Might Outperform Royal Bank Of Scotland Group plc and BHP Billiton plc appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.