Today, I’m looking at three stocks that have all been big holdings in the past for troubled fund manager Neil Woodford. Mr Woodford has sold some of his shares to raise cash. But I believe these firms look attractive at current levels.

A retail essential?

Payment processing firm PayPoint (LSE: PAY) is trying to make the leap from handling cash bill payments to providing a comprehensive range of services for convenience retailers.

The company says that 13,000 of its 28,000 sites are now using the firm’s flagship PayPoint One electronic point of sale system, which provides a wide range of business services.

However, investors received a sharp reminder about the importance of this strategy in June, when PayPoint said its contract to handle British Gas bill payments and prepayment services will not be renewed.

This is expected to result in a £3.5m loss of revenue next year, but management says that underlying pre-tax profit is still expected to rise. I think the bigger question is whether the firm will have to cut its fees to avoid further contract losses.

Despite this concern, I continue to rate this profitable and cash-generative business as a buy. Its national network means that 99% of the UK population is within a mile of a PayPoint terminal.

Trading on 14 times forecast earnings and with an 8% dividend yield, I remain happy to hold and may buy more. Mr Woodford remains a major shareholder too, with just under 11% of PayPoint stock.

This 7% yielder could start climbing

Another of Neil Woodford’s long-term holdings is subprime lender Provident Financial (LSE: PFG).

Shares in this doorstep and online lender crashed in 2017, when previous management attempted a botched restructuring. The firm lost customers and missed many payment collections in the chaos that followed. A number of regulatory issues have also caused problems.

However, the company says that all of these issues have largely been resolved and that trading is improving. All four of the group’s main divisions reported lending growth during the first quarter.

Mr Woodford has cut his stake from 23.44% to 17.98%. But I suspect that he is a reluctant seller. My view is that the firm’s turnaround is likely to come good over the next year.

With the shares trading on just 8 times 2019 forecast earnings and offering a yield of 7%, I can see plenty of upside if Provident delivers on forecasts for 23% earnings growth in 2020.

Unfairly dismissed

My final pick is defence-focused engineering contractor Babcock International (LSE: BAB). The shares have fallen by more than 40% over the last year as the firm has weathered suggestions of contract problems and financial difficulties.

So far, none of these have proved to be true. Babcock’s 2018/19 results showed stable performance and an unchanged £31bn order book. Net debt fell and the group’s cash generation improved.

This type of business is always at risk of a major contract going bad. But Babcock’s specialist engineering skills mean that it enjoys much higher profit margins than most outsourcers.

The shares currently trade on just 6 times forecast earnings and offer a well-covered 6.8% dividend yield. Mr Woodford has reduced his funds’ stake below the 5% disclosure limit and may have sold completely. Personally, I think the shares are too cheap. I rate BAB as a buy.

The post 3 FTSE 250 dividend stocks with yields over 5% I’d buy in July appeared first on The Twelfth Magpie.

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• Why has this FTSE 100 defence stock collapsed 7% today?
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Roland Head owns shares of Centrica and PayPoint. The Motley Fool UK owns shares of PayPoint. 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.

Both are out of favour with investors, but neither is in serious distress. With dividend yields of more than 6% on offer, I’ve been taking a closer look to find out more.

This defence firm is under attack

Shares in defence and engineering contractor Babcock International Group (LSE: BAB) have fallen by 45% over the last year. One reason for this is that the firm has been subject to a shorting attack by a mysterious group called Boatman Capital Research.

Babcock has strongly denied the allegations made by Boatman, which include suggestions that it has a poor relationship with the Ministry of Defence and that it may have overpaid for a recent acquisition.

As outside investors, we can never be completely sure of such things. But in my view, Babcock’s latest annual results suggest that the company’s financial performance is stable and consistent with management commentary.

Is the outlook improving?

Despite these reassurances, it’s clear that Babcock is struggling to deliver any kind of growth. Last year’s results showed that underlying revenue fell by 3.8% to £5,161m, with underlying pre-tax profit rose by just 1.1% to £518m.

However, there were some positives. Improved cash generation enabled the company to reduce debt levels while supporting a full-year dividend of 30p per share.

The outlook for the year ahead can best be described as downbeat. As major contracts wind down, revenue is expected to fall by around 5% while operating profit is expected to be about 10% lower.

However, this bad news is already known and reflected in the stock’s valuation. Babcock shares currently trade on just 6.2 times 2019 forecast earnings, with a forecast yield of 6.6%. The business is expected to return to growth in 2020/21. In my view, this could be a good opportunity to build a long-term position in this unloved stock.

Going nuclear

Oil services firm John Wood Group (LSE: WG) has a pretty decent reputation among investors. The dividend has risen every year since its flotation in 2002, delivering 17 years of income growth.

This rising payout has been backed by solid operational performance, good cash generation and a strong balance sheet.

However, the firm’s decision to acquire rival Amec Foster Wheeler in 2017 required it to take on a big chunk of debt. Chief executive Robin Watson promised to make repaying this borrowed cash a priority. But Wood’s latest results show that this could take a little longer than expected.

I’d normally be suspicious of a situation like this. But given Wood’s track record I’m prepared to trust Mr Watson to deliver on his promise.

The Amec deal has enabled the company to expand into areas such as nuclear energy, while consolidating its core oil and gas business. Wood Group returned to growth last year, delivering results that were slightly better than expected. Further improvement is expected in 2019 and debt continues to fall.

WG stock currently trades on less than nine times forecast earnings and offers a 6.9% dividend yield. I reckon that’s too cheap.

The post Are these 6% FTSE 250 dividend yields beautiful bargains or value traps? appeared first on The Twelfth Magpie.

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• Why has this FTSE 100 defence stock collapsed 7% today?
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• How much is needed in an ISA to target a £1,046 monthly passive income in retirement?

Roland Head has no position in any of the 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 I’ve changed my mind

If you’ve read my previous coverage of TalkTalk over the last few years, you’ll know that I’ve been avoiding the stock. So what has changed?

I think the plans set out by founder Sir Charles Dunstone when he returned to the firm in May 2017 are starting to deliver results. The main thrust of the strategy is for it to be a large-scale value provider of fixed broadband only.

Figures released today suggest that progress is steady. The company reported a net increase of 490,000 subscribers for fibre broadband. Total customer numbers rose by 150,000 to 4.3m and the firm has now seen nine consecutive quarters of growth.

Of course, it’s easy to win customers by slashing prices. So is TalkTalk becoming more profitable as well?

Rising profits

Today’s figures are mixed. Underlying revenue rose by 2.2% to £1,544m, while operating profit excluding certain one-off costs rose by 46% to £89m. Much of this gain was due to lower operating costs, which the firm says will be a continued focus.

Restructuring and network upgrades are continuing to absorb much of the firm’s spare cash. But even if we include all costs, TalkTalk moved from an operating loss of £44m to an operating profit of £47m last year.

More importantly, cash generation improved, leaving the dividend covered comfortably by free cash flow. Net debt remains a concern, at £781m. But no significant repayments are due until 2022, by which time costs should be lower and income higher.

TalkTalk shares don’t look cheap, with a 2019/20 forecast price/earnings ratio of 18 and a forecast dividend yield of 2.8%. But if earnings continue to recover, I think the current price could offer good value. If I wanted to add TalkTalk to my portfolio, I’d certainly consider buying after today’s results.

Powering up for growth?

Temporary power solutions provider Aggreko (LSE: AGK) is another firm that’s been through a long decline. This company rents out generators to provide power for large events and also operates in emerging markets, where it can provide additional grid power to meet growing demand for electricity.

The shares have fallen by about 65% since September 2012. However, Aggreko’s latest figures confirmed my view that this business is on the mend. The group’s underlying revenue rose by 8% to £1,760m while underlying pre-tax profit was 10% higher, at £182m.

I am generally cautious about companies’ underlying figures, which include adjustments designed to flatter profits. But I’m comfortable with Aggreko’s adjusted numbers. The only real changes relate to exchange rates and fuel costs, which are passed through to customers.

My calculations indicate that the firm’s operating profit margin rose from 10.8% to 12.4% last year. There were also improvements in free cash flow and underlying earnings. Analysts’ forecasts suggest modest growth in 2019 followed by bigger gains in 2020, when the company will provide power for the next Olympic Games.

The shares currently trade on 16 times 2019 forecast earnings, with a 3.4% dividend yield. I think this could be a decent entry point for long-term buyers.

The post Why I think now’s the time to buy these FTSE 250 stocks appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the 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.

On the other hand, there’s obviously some risk of a cut. So today, I want to take a closer look at this popular stock. I’ll also consider another unloved stock that’s yielding 6% and has caught my eye as a potential buy.

Still a lot to prove

The merger of Standard Life and Aberdeen Asset Management was meant to leave shareholders with the best of both groups’ asset management businesses and some useful economies of scale.

Standard Life’s insurance assets would be sold, reducing the group’s capital requirements and opening the door to more generous shareholder returns.

So far, the evidence is mixed. The £.3bn insurance sale proceeded to plan and the combined firm now owns a 20% stake in insurer Phoenix. About £1,175m of cash from the deal has been, or will soon be, returned to shareholders.

The asset management side isn’t working so well. Net outflows from the group’s funds increased to £41bn last year, cutting assets under management by about 10% to £552bn. A decision last year by Lloyds Banking Group to remove £109bn of assets from the group was a further blow.

Why I’d buy

Standard Life Aberdeen has a lot to prove. But I think the share price reflects this. One valuation technique that’s often useful when assessing fund managers is to compare the firm’s market value with the value of its client assets.

For SLA, this gives a figure of about 1.2%, which is very low. By contrast, FTSE 100 rival Schroders has a ratio of 2% and at FTSE 250 firm Jupiter Fund Management the figure is 4%.

Standard Life Aberdeen’s low valuation may be justified at the moment. But any sign of improvement would be likely to trigger gains, in my view. The group now has a highly experienced new chairman on board, ex-HSBC chair Douglas Flint, who will probably be keen to see progress. Although the 8% dividend yield remains at risk of a cut, I think it’s a risk worth taking. I see this stock as a recovery buy at current levels.

A hidden gem?

Outsourcing group Babcock International (LSE: BAB) has lost the market’s trust over the last couple of years. The group’s shares have halved in value since late 2016 but, unlike rivals, it hasn’t run into financial problem or seen profits collapse.

One key difference may be that the group’s focus on defence contracting means that much of the work it carries out is skilled and essential. Although Babcock has historically relied heavily on UK government contracts, it’s working hard to diversify into markets such as North America and Australia.

Some investors remain bearish on Babcock. But in my view it seems increasingly likely that the shares are offering investors a good opportunity to buy. Underlying profits are expected to be flat this year, which should provide decent support for the 30p dividend.

The arrival of new chairwoman Ruth Cairnie could be the catalyst needed for investor sentiment to improve. With the shares trading on just 6 times 2019 forecast earnings and offering a 6% yield, I think this could be a good time to buy. I’ve added the shares to my own watch list.

The post Are the Standard Life share price and 8% yield too good to be true? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.

My first company could be a controversial choice. Engineering group Babcock International Group (LSE: BAB) has come under attack from short sellers recently. The company disputes most of these allegations, but today’s half-year results have left the shares down by 5%, at the time of writing.

Good and bad news

Investors fear that Babcock will turn out to be another outsourcer with loss-making contracts, shrinking profit margins, and too much debt. In my view, today’s figures justify some of these concerns, but certainly not all of them.

The good news was that the group’s underlying results were in line with expectations. Exiting low-margin businesses helped to lift underlying operating profit rose by 1.4% to £279.6m, even though revenue fell by 2.3% to £2.577bn.

A significant improvement in free cash flow provided the cash needed to reduce net debt by £159m, to £1.132bn. This reduced the group’s net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) multiple from 1.9x to 1.6x.

Looking ahead, the group’s combined order book and pipeline expanded by 3% to £32bn, including £650m of new orders from the Ministry of Defence.

Unfortunately, today’s figures also included some bad news. The firm’s contract to decommission Magnox nuclear reactor sites ends next year. Management now expect revenue to fall by about £250m, more than double previous guidance of £100m. The loss of the contract is expected to wipe £20m off the group’s operating profits.

Guidance unchanged

Chief executive Archie Bethel says that the outlook for the 2018/19 financial year is unchanged. He’s expecting single-digit revenue growth and improved profit margins.

Broker forecasts put the shares on a 2018 forecast price/earnings ratio of 6.6, with a dividend yield of 5.2%. If the outlook remains stable, I believe these shares could be an income buy.

A safer option?

If you’re concerned about the outlook for Babcock, one alternative I’d consider is FTSE 250 engineer QinetiQ Group (LSE: QQ). This business is focused on developing its own products and technology, which should give it a stronger competitive edge.

QinetiQ’s business mainly operates in the defence and aerospace sectors. Historically, it’s worked mostly for the UK Ministry of Defence, but this is changing. International customers accounted for 31% of revenue during the first half of the year, up from 26% during the same period last year.

One reason for this changing strategy is that profit margins on UK government contracts are falling. As a result, analysts are forecasting a 10% fall in underlying earnings per share this year, with a modest return to growth in 2019/20.

The group’s half-year results supported this view. Underlying operating profit fell by 11% to £51.1m, despite sales rising 7% to £420.3m.

Falling profit margins aren’t ideal. But I believe the firm should be able to continue winning attractive new work. In the meantime, a net cash balance of £250m means that management has money available to invest in new opportunities.

QinetiQ shares have risen by 15% so far this year. This has left the stock trading on a forward price/earnings ratio of 15.5, with a 2.4% dividend yield. This isn’t cheap, but I think the long-term potential of this business means the price is fair.

The post Have £2,000 to invest? Here are two FTSE 250 dividend stocks I’d buy today appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• Why has this FTSE 100 defence stock collapsed 7% today?
• 3 beaten-down FTSE 100 shares to consider buying and holding for a decade
• How much is needed in an ISA to target a £1,046 monthly passive income in retirement?

Roland Head has no position in any of the 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.

Housebuilder Taylor Wimpey (LSE: TW), for example, has declined by 20% in the last six months. Demand for housing, it is feared, could fall if the UK’s economic performance fails to improve. As a result of its decline, could the stock be worth buying alongside another faller that reported a positive trading update on Monday?

Improving outlook

The company in question is engineering services business Babcock (LSE: BAB). It reiterated its important supply arrangements with the Ministry of Defence, while also highlighting that it is on track to meet its financial guidance for the 2019 financial year. It continues to exit a number of small, low-margin businesses including the Appledore shipyard. It is also reshaping its oil and gas business, seeking to deliver growth.

The company continues to seek to reduce debt. It anticipates that its net debt-to-EBITDA ratio will be around 1.4 times by March 2019, and expected to fall to 1.1 times by March 2020.

Looking ahead, Babcock is forecast to post a rise in earnings of 2% this year, followed by further growth of 5% next year. It trades on a price-to-earnings (P/E) ratio of 7.3, which suggests that it offers a wide margin of safety at the present time. With demand for defence-related products and services expected to rise over the medium term as the industry benefits from an end to austerity, the outlook for the stock could improve.

Fundamental strength

The fundamentals of the housing market continue to be strong, and this could lead to a successful recovery for the Taylor Wimpey share price. Interest rates are expected to remain low, and it is seemingly unlikely that the Bank of England will risk a more hawkish monetary policy at a time when the UK is undergoing major political and economic change. This could help to keep mortgage availability high, and may lead to rising house prices over the coming years.

With the government’s Help to Buy and stamp duty relief policies helping to drive demand for new-build properties higher, the performance of UK housebuilders may surprise the stock market. Taylor Wimpey has been reporting robust demand for its properties, and this trend could continue, due in part to an imbalance between demand and supply which has worsened over the last few decades.

With the company’s share price having fallen by 20% in six months, it now has a P/E ratio of around 7.8. This suggests that it could offer strong long-term growth potential, with the prospect of an upward re-rating, alongside growing earnings, set to drive the company’s valuation higher. Although it may take time for it to realise its full valuation potential, the stock seems to have value investing appeal.

The post Is FTSE 100-member Taylor Wimpey’s share price a steal after a 20% fall? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Babcock International Group and Taylor Wimpey. 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.

Underlying trouble

Presumably they expected worse. That’s understandable, given that the FTSE 250 firm’s share price plunged 12% last time it updated the market in July, when it forecast slightly lower underlying revenue growth than expected. That was despite reiterating its underlying earnings guidance for financial year 2018/19, and stating that its bid pipeline was up £1bn to around £14bn. 

The £3.57bn company also reported an order book and pipeline that remains unchanged at around £32bn (£18bn order book, £14bn pipeline). Around 87% of revenue is now in place for 2018/19 and around 57% for 2019/20, which gives investors a lot of forward visibility.

Second half winner

Management continues to expect low single digit underlying organic revenue growth at constant currency for the full year, with stable margins. Its underlying earnings guidance remains unchanged and revenue and cash flow performance will continue to be second half weighted. Management expects to continue to reduce its debt to an EBITDA ratio of around 1.4 times by the end of the year.

Babcock’s share price trailed down after the initial excitement, or should I say relief, because its investors have endured a rotten time lately, with the stock trading 35% lower than five years ago. Questions continue to be raised about its long-term contract accounting, lack of external board hires and cash conversion, as RBC Capital Markets recently noted, although with a forecast valuation of just 8.2 times earnings, many of these are priced in.

The yield is 4.4%, with cover of 2.8, which is also attractive. Earnings growth projections of 2% and 5% in the next two years may not suggest a shoot-the-lights-out stock, but this is a turnaround play to watch.

On the rebound

The share price of fellow FTSE 250 engineering company Meggitt (LSE: MGGT) has fared slightly better than Babcock’s, although hardly enough to catch the eye. It has jumped 26% in the last six months, helped by last month’s positive interims, which raised full-year organic revenue growth forecasts on better-than-anticipated first-half trading and strong order intake.

The £4.28bn company boosted free cash flow by 19% while cutting debt by 7%, and further pleased investors by lifting its interim dividend 5% to 5.3p. Meggitt specialises in high performance components and sub-systems for the aerospace, defence and energy markets. But trading at a forecast valuation of 16.2 after the recent share price bounce back means it’s no longer in bargain territory. A forecast yield of 3.1% with cover of 2.0 is nothing to complain about, yet nothing to get too excited about either.

Bargain buy

City forecasters reckon the company’s earnings per share could fall 7% this year, then rebound 10% in 2019. However, I can’t get too excited. After Meggitt’s recent share price spurt, it might be worth looking elsewhere. Of the two, I would buy Babcock first. It could just be a bargain.

The post One FTSE 250 growth and income stock I’d buy today and one I’d sell appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.

The decline is due to a slowdown in government defence spending that’s hit the FTSE 250 firm’s marine division. Spending on the Queen Elizabeth aircraft carrier has declined as expected, but the group has also been hit by delays to planned spending on submarines. These changes are now expected to limit revenue growth to a “low-single-digit” percentage this year.

Businesses which work on large engineering contracts inevitably suffer occasional delays, so I’m not too concerned about this. Today’s trading update wasn’t a profit warning and management is trying to diversify by winning more overseas work.

Importantly, Babcock still expects to hit full-year targets for underlying profit and debt reduction. This should see its net debt-to-EBITDA ratio fall to around 1.4 times, down from 1.6 times at the end of last year. This level of gearing is significantly lower than some rivals, and looks comfortable to me.

Solid numbers

The order book appears to remain fairly stable, with an £18bn backlog of signed orders, unchanged from 31 March. About 83% of expected revenue is secured for the 2018/19 financial year, with 55% secured for 2019/20.

Analysts expect the company to deliver adjusted earnings of 85p per share this year, and a dividend of about 30p. After today’s fall, this puts the stock on a forecast P/E of 8.3 with a dividend yield of 4.4%.

This could be a reasonable entry point, but this is the second time this year that Babcock has warned on sales. I’m a little wary about the risk of further bad news. I wouldn’t rush to buy just yet.

On the rebound

The Imperial Brands (LSE: IMB) share price fell to a four-year low of 2,298p earlier this year, as investors registered concerns about the group’s lack of growth and its high levels of debt.

At the time, my Foolish colleague Ed Sheldon explained why he thought the stock looked oversold. Imperial’s half-year results seemed to confirm Ed’s view, revealing a £1.2bn reduction in net debt and flat sales. After-tax earnings fell by just 1% on an adjusted basis, suggesting that the outlook for profits remains stable.

Time to buy?

The tobacco giant’s share price has started to recover, but it remains well below the £30-£40 range seen in recent years.

Although I am concerned about the £13bn net debt, Imperial’s cash generation remains very strong. My calculations suggest that free cash flow has totalled about £2.5bn over the last 12 months. This compares to around £1.6bn paid out as dividends during this period. If this performance can be maintained, I think net debt should gradually fall.

In the meantime, the shares trades on 11 times 2018 forecast earnings with a prospective yield of 6.5%. In my view this is cheap enough to reflect the risks of investing in this sector. I’d rate the stock as an income buy at this level.

The post Why I’d shun this FTSE 250 dividend and buy this FTSE 100 6% yielder instead appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

In line with expectations

The directors expect full-year earnings and cash conversion to be in line with their expectations, which tells us that nothing has thrown the outlook. City analysts following the firm forecast growth in earnings per share of 3% for the trading year to March 2018 and 4% the year after that. That’s nothing to become excited about, but it’s better than a decline in expected earnings.

Although earnings aren’t growing fast, the quality of those earnings looks like it is improving. The directors say that margins will be higher than they thought for the year “due to a combination of more favourable margin mix and a continued management focus on efficiency improvements.” But although margins are rising, revenue is falling and looks set to come in “slightly lower” than expected at between £5.3bn and £5.4bn.

Revenue under pressure

Revenue is under pressure because of ongoing “tough trading conditions and short cycle order placement delay” in the offshore and oil & gas sector. There has also been a slowdown in volumes relating to defence sector commodity and spares procurement, and “slower mobilisation on the MSSP equipment and engineering management contract for MoD.”

Should we be worried? Maybe. The dividend yield for the current year sits at around 4.6% with the payment set to be covered a healthy-looking 2.8 times by forward earnings. Over four years, the dividend has grown 26%, but that’s the main attraction from an investment point of view, because earnings growth is so pedestrian.

Strong bidding activity continued during the second half of the year and the short-term bid pipeline has increased to around £12.5bn, driving a “combined order book and near-term opportunity pipeline at £31bn.” However, I reckon there’s a fair degree of cyclicality in the operational set-up, which could send earnings and the dividend into reverse at some point if the economic sun stops shining, so I’d rather take my chances with defensive pharmaceutical firm GlaxoSmithKline (LSE: GSK).

An attractive dividend

When it comes to medicines, demand is far less cyclical, which means we can invest in GlaxoSmithKline with reasonable confidence that the cash flowing into the business will remain constant whatever the economic weather. To me, that situation makes the dividend yield of around 6.4% attractive. However, I’m not expecting rapid growth in either the dividend or in earnings. The dividend payment has been flat for around five years and the firm is struggling to grow earnings. The well-reported problems big pharmaceutical firms have endured due to patent expiry has allowed generic competition to swoop in, pulling the rug from margins on many of GlaxoSmithKline’s big-selling drugs.

Back in October, the firm’s third-quarter results suggested ongoing workmanlike progress rebuilding earnings. We can find out more about the headway being made with the full-year results due tomorrow, Wednesday 7 February. I’m expecting more of the steady operational advances we’ve seen lately.

The post Why I’d avoid this 4.5% dividend yielder and buy GlaxoSmithKline plc instead appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentoned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.

Management reported strong order intake during the fourth quarter and said that 62% of 2018 revenue has already been secured, compared to 56% at the same point last year. The year-end order book stood at £900m, but executive chairman Douglas Caster said that the true figure could be higher, as it excluded sales from ongoing open-ended contracts in the aerospace and US defence sectors.

Mr Caster confirmed that cash generation has remained strong and reiterated the board’s plan to pay a final dividend of 35p per share for 2017.

All in all, it was a good update — but why have the shares rocketed? To understand this you need to rewind two months to November 13, when Ultra issued a profit warning. Lower UK defence spending had resulted in the MoD “pausing, cancelling or delaying numerous programmes”. The firm’s shares fell by about 20% in one day.

A brighter outlook

What’s interesting about today’s statement is that guidance for the current year is unchanged. Total revenue is expected to fall by 2% to £770m, while underlying operating profit is expected to drop 8.5% to £120m. What’s changed is the outlook, which now appears more positive.

So are the shares a buy? I’m tempted to say yes. Ultra Electronics is still trading around 15%-20% below the levels seen before November’s sell-off.  That leaves the stock on a forecast P/E of 12.5, with a prospective yield of about 3.4%.

Given the group’s strong cash generation and more stable outlook, I think this is cheap enough to provide an attractive entry point for investors, even if growth does remains slow.

Another defence opportunity

Ultra Electronics isn’t the only buying opportunity I see in the defence sector. Another stock that’s on my watch list is engineering services group Babcock International Group (LSE: BAB).

The firm’s shares have been hit by the wide-ranging sell-off seen across the outsourcing sector. Fears of UK defence spending cuts have also hit the stock. But so far Babcock appears to have avoided the kind of problems faced by outsourcing rivals. Nor has it been hit by spending cuts.

Indeed, in November’s interim results, chief executive Archie Bethel commented on “the increasing number and value of our opportunities both in the UK and internationally.”

The group’s H1 results certainly appeared positive. Underlying revenue rose by 5.9% to £2,638.9m, while underlying pre-tax profit climbed 4.9% to £239.5m. Although the order book fell from £20bn to £18.5bn, the company reported an increased bid pipeline of £12.2bn, up from £10.8bn one year earlier.

In my view, Babcock has several advantages over other outsourcing firms. I’d expect its specialist focus on skilled defence and engineering work to make it harder to replace than — for example — a security or facilities management contractor.

The group’s specialist skills also appear to allow for stronger pricing. Its 9% operating margin is significantly higher than those of peers such as G4S or Serco.

Given these strengths, I think the stock’s 2017 forecast P/E of 8.6 and expected yield of 4.1% are probably cheap enough to deserve a ‘buy’ rating.

The post 2 unloved dividend stocks you might regret not buying appeared first on The Twelfth Magpie.

More reading

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• How much is needed in an ISA to target a £1,046 monthly passive income in retirement?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Ultra Electronics. 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.