Moments like these are a great time to top up your portfolio as you work towards your long-term goal of building a million-pound pot for your retirement. Ian Lance, equity income fund manager at RWC Partners, reckons today’s best opportunities can be found in unloved ‘value’ stocks that have been overlooked by the market but offer great long-term potential.

Lance, a fund manager for more than three decades, has unearthed several companies with profitable subsidiaries that are actually worth more than the entire group’s valuation.

It is hard to love broadcaster ITV (LSE: ITV), which trades 70% lower than five years ago. The ITV share price was in long-term decline even before the pandemic. Competition from streaming services, squeezed advertising revenues and slowing growth at its much-heralded ITV Studios division have hit profits.

Check out these bargain FTSE stocks

The ITV share price is down by half this year alone, as advertising revenues fell 42% in the pandemic, while the group was forced to pause programme making.

As Lance points out, ITV is in effect two businesses: broadcasting and content production. In 2019, content production delivered profits of £267m. This would suggest a company valuation of £3.5bn, measured at 13 times earnings. Yet the entire group has a market cap of just £3.18bn today. This means the broadcast business, which made £500m last year, is effectively available for free. That looks like a bargain FTSE stock to me.

Here’s another figure that might tempt you. Netflix spends around $15bn a year on content production, Lance notes. “For a fraction of this, they could have ITV’s entire back catalogue and all future content.”

This is likely to be a tricky year for ITV, but it still looks like a tempting bargain FTSE 100 stock to me.

Another dirt-cheap stock to consider

The outsourcing industry was hit hard by the collapse of Carillion and Interserve, while Kier Group and Capita Group (LSE: CPI) survived by the skin of their teeth.

The Capita share price took another beating in the Covid-19 crash. Its face-to-face training, resourcing, contact centres, consultancies and corporate travel agency operations have been locked down. However, investors spotted a bargain FTSE stock and piled in, driving the stock up 30% in the last month.

Capita’s high-margin software division made just over £100m of EBIT in 2019, which valued at a modest 15 times earnings would be worth £1.5bn, while the rest of the group delivered £200m of earnings. Yet today, the group has a market cap of just £681m.

Lance says ITV and Capita are undervalued by a market that is fixated on short-term earnings momentum. He reckons these are genuine bargain FTSE shares and so do I, if you are investing for the long term.

You will not make a million from investing in shares overnight. However, by identifying bargain FTSE stocks like these during a crash, you can accelerate your progress.

The post I’d buy these 2 bargain FTSE stocks to make a million from the stock market crash appeared first on The Twelfth Magpie.

More reading

• £500 gets 617 shares in one of the top FTSE income stocks to buy!
• Here’s how to invest £3,600 in UK shares to target a 7% dividend yield
• Should I buy ITV shares for my ISA ahead of the World Cup?
• With dividend yields averaging above 7%, are these 2 UK shares worth considering?

Woodford woe

In the summer of 2015, its share price briefly topped 800p. Today, it lurks around the 120p mark, having lost 85% of its value. The stock was a favourite of fund manager Neil Woodford but now stands as another black mark against his name. Some people like to go shopping for stocks like this one, should you?

The FTSE 250 business services and outsourcing group published its full-year 2018 results today which saw pre-tax profits fall 26% to £282m. This was actually better than expected, given that guidance suggested a lower range of £250m-£270m.

Falling debt

Debt fell from £1.1bn to £466m, helped by the £701m gross proceeds from a rights issue and £408m from disposals. Capital has also embarked on a phased pension deficit reduction plan, which will cost it around £176m.

Chief executive Jon Lewis said the group had successfully completed year one of its multi-year transformation, fixed the basics, and is now firmly on track. “We’ve strengthened our balance sheet, achieved cost savings, and invested in our people.” 

The transformation has some way to go, but Lewis sees significant structural growth in providing digitally-enabled services and software solutions. So is this a recovery you can believe in?

Recovery position

The £1.97m company has been slashing costs and offloading assets to create a simplified and strengthened operation, but still has a long way to go. It looks cheap, trading at 8.8 times earnings, despite a 23% share price recovery over the last year.

Earnings are forecast to fall another 25% this year, the fourth successive drop. But next year could see a 29% bounce, so there’s hope. By then, the dividend may even be back, although the yield will be just 0.6%. Capita’s road to recovery looks set to be a long one, but my Foolish colleague G.A. Chester rates it a buy.

Rogue Mail

Royal Mail (LSE: RMG) has had a massively volatile time of late. It currently trades at just 261p, way off its 52-week high of 632p. Those who claimed the Government under valued the stock at flotation got things the wrong way round.

This will alert many to the possibility of a bargain, with the group trading at just 10.2 times forecast earnings and a lowly price-to-revenue ratio of just 0.2. Be warned, earnings are forecast to fall 42% in the tax year to 31 March 2019, and another 5% the year after.

Profit problems

The big temptation is its massive forecast yield of 9.1%, albeit with wafer thin dividend cover of 1.1. Inevitably, there has been talk of a dividend cut, although even if it was slashed in half you would still have a decent level of income.

Royal Mail faces long-term problems, such as the decline of letters, offset by steady growth at its UK parcels arm and the international Global Logistics Systems (GLS) business. There was also that shock profit warning in October. I’m drawn to its low valuation and dizzying yield, but management faces a massive task responding to a changing world where Royal Mail has yet to find its place.

The post Are the Royal Mail share price and this Neil Woodford nightmare stock unmissable bargains? appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Harvey Jones 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.

The question is, should investors buy into this recovery story today or is it worth staying away for longer? 

Time to buy? 

After a £681m rights issue and a series of asset sales, including the £235m divestment of its parking management business ParkingEye to Macquarie Principal Finance (announced today), Capita is no longer on the brink. However, the group is not expected to return to growth any time soon. Analysts are forecasting a decline in earnings per share of 47% to 14.4p for 2018, and a further decline of 8% to 13.3p for 2019. These estimates put the stock on a forward P/E of 9.5 for 2019. 

While a forward P/E of 9.5 might look cheap, I think it’s about right for a business that’s still selling assets to shore up its balance sheet with no earnings growth expected for the foreseeable future. And after suspending its dividend back in January, investors don’t even have a token dividend payout to keep them happy as the recovery continues. With this being the case, I’m not a buyer of Capita after recent declines, although my Foolish colleague G A Chester seems to disagree. 

The comeback trail

One Neil Woodford stock that I am interested in, however, is Provident Financial (LSE: PFG). Just like Capita, this company has recently fallen on hard times and management had to undertake a rights issue earlier this year to shore up the balance sheet. After the £331m capital raise, which was less than many analysts have been predicting, the City is expecting the group to report a sharp recovery in income by 2019. 

Unlike at Capita, EPS are projected to fall 81% in 2018, but then surge 25% in 2019. On this basis, the shares are changing hands for 8.6 times forward earnings. 

And as well as the attractive valuation, analysts are forecasting a dividend paid per share of just under 43p for 2019, giving a dividend yield of 7.7% on the current share price. 

So, Provident is both expected to return to growth next year and reward shareholders with a market-beating dividend yield.

Recovery on track 

A recent trading update confirmed that it is on track to return to growth before the end of the decade. At the end of the third quarter, Provident’s credit card business Vanquis Bank reported a 6.3% increase in customer numbers to 1.8m. Efforts to stabilise the door-to-door home credit card also appear to be paying off, although collections are still below historical levels according to management. 

Nevertheless, it looks to me as if Provident’s overall recovery is well under way and investors should be well rewarded if the group can continue on its current trajectory, and hit City growth numbers for the next few years. I see no reason why the company would not be able to meet the City’s future growth targets at this point.

The post Is it finally time to buy this Neil Woodford favourite after falling 15% in two months appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

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.

Rock bottom?

I’ve actually been pretty scathing about Capita (LSE: CPI) after tough trading conditions led to a price collapse, and I’d been fearing further bad news which could make things even scarier. For years we had a company paying out around half of its earnings as dividends while shouldering big debts, and I reckon that was madness. But I think things are changing.

Firstly, that unwise dividend was eliminated when full-year results were released. But, you might ask, how can I then select it as a dividend stock for retirement? Well, at the time, the firm said it “recognises the importance of regular dividend payments to investors… and will consider the payment of dividends once Capita is generating sufficient sustainable free cash flow.“

If Capita can get back to generating that cash, I can see decent dividends being reinstated, and that long-term outlook is what drives my thinking. And I’m starting to think that there’s too much pessimism in the share price just now — even though it has been picking up.

Tuesday’s news of a new MoD contract has pushed the shares up 6% at the time of writing, after the company confirmed it has been chosen to run the UK military’s fire and rescue services. The deal was politically controversial, and it had been narrowed down to Capita or Serco.

The MoD’s apparent assessment that Capita is financially sound is welcome, and though there are still a couple of tough years ahead, I think the turnaround point could have been reached. I think Capita shares are now worth the risk.

Growth and dividends

Kier Group (LSE: KIE) is another in the sector whose shares have been hit hard, but forecasts are still looking pretty decent, there’s still a big dividend on the cards, and valuations appear very low.

In fact, we’re looking at forecast P/E multiples of only around 8.5 this year, dropping to 7.7 by 2019. With EPS expected to grow by around 10% per year, that gives us PEG ratios of 0.9 and 0.7, which are attractive by growth standards.

On top of that, dividends are predicted to yield 7% per year and would be around 1.8 times covered by earnings. What’s not to like about that?

Actually, we again have the issue of a company paying big dividends while shouldering a fair bit of debt. In this case, Kier reported net debt of £239m at 31 December 2017, up from £179m a year previously. But at least the company reckoned it should be reduced to less than one year’s EBITDA by 30 June, and that’s a figure that really shouldn’t cause any big trouble. Kier’s pension deficit was reduced to £19m too, which looks fine.

Having said that, I still can’t quite square the idea of paying very big dividends while holding high debt, and I’d prefer to see Kier reduce its dividend yield, perhaps to around 5%, for a few years and use the difference to pay down some debt. That, I think, could restore some of the confidence that has been lost.

Kier shares look good long-term value to me.

The post 2 FTSE 250 dividend stocks I’d buy and hold for my retirement appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Alan Oscroft 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.

To shore up the balance sheet, management is looking to raise £701m, or £662m after fees to advisers, from shareholders. This will enable the group to pay down some of its £1.2bn net debt (there’s also a £407m pension deficit to deal with), fund its restructuring and invest in new technology. 

The three-for-two rights issue will see the firm issue one million new shares at 70p each, a discount of 34% to the theoretical price that the shares should trade at after the rights issue.

Neil Woodford’s Investec and Woodford Investment Management will be the most significant contributors to the fundraising as they are Capita’s largest investors with a 15% stake. 

Uncertainty removed? 

City analysts have been waiting for further details on Capita’s rights issue, and now that the company has put out more information, some of the uncertainty over its future has been removed. However, despite this clarity, I’m still not interested in the shares. 

I believe that Capita is only at the start of a long process of restructuring. According to the company’s full-year 2017 figures, management expects underlying pre-tax profits of between £270m and £300m for the year ending 31 December 2018, before restructuring costs. This figure is more than 20% below the underlying profit of £383m reported for 2017. The enterprise reported a £513.1m annual loss on revenues of £4.2bn for the year to the end of December. 

Management does not expect the firm to return to growth until 2020 as the group works through its existing cache of contracts. 

To help fund the turnaround, management has also decided to eliminate Capita’s dividend distribution until it is “generating sufficient sustainable free cash flow,” which could take several years. 

Plenty of work to do

Add all of the above together, and I believe that while Capita’s outlook has improved now that it has announced a rights issue, it will be several years before the business is back on track and growing again. With this being the case, it seems to me as if investors face several more years of uncertainty and, perhaps more importantly, no income while they wait for the turnaround. 

There is also no certainty that Capita will be able to turn itself around successfully over the next few years. New CEO, Jonathan Lewis has set out to fix the company’s “short-term focus” as well as its lack of “operational discipline and financial flexibility,” which sounds impressive, but I would like to see results before investing. 

Indeed, the whole outsourcing sector is currently struggling as rising costs are eroding razor-thin profit margins on contracts signed years ago. It will be some time before these legacy issues run off and the industry can return to growth. 

So overall, for the time being, I would avoid Capita. There are plenty of other investments out there with a brighter outlook. 

The post Why I won’t touch Capita with a bargepole after today’s news appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

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.

With concerns building about the sustainability of the outsourcing business model, investors have dumped shares in Capita (LSE: CPI) and Interserve (LSE: IRV), sending them plunging to multi-year lows. However, after falling by more than 60% in the space of 12 months, the shares have started to attract bargain hunters, but is it worth taking a punt on these turnarounds or is it best to stay away ahead of further declines?

Two key problems

Capita and Interserve both face two primary issues. Firstly, these firms have been beset by rising costs on legacy contracts. For example, during the past year, Interserve has issued two profit warnings related to spiralling expenses on an energy-to-waste contract. Capita’s turnaround is also being weighed down by these legacy contracts, which can be difficult to restructure and were agreed when costs were much lower.

The second issue these companies are having to grapple with is their weak financial position. Capita has a debt pile of more than £1bn to contend with, as well as a £381m pension deficit. Meanwhile, City analysts believe that Interserve’s debt could hit £600m by the end of 2018, compared to its current market value of £107m.

To try and fix its balance sheet, at the end of January Capita announced a £700m rights issue and suspended its dividend until it can generate a “sustainable free cash flow.” This highlights another problem with the outsourcing business model. Cash flow generation is generally very poor and managements has only exacerbated this issue over the past five years by pursuing unsustainable dividend policies, which have been funded by debt. For example, over the past five years, Interserve generated £175m in cash from operations but paid out £152m in dividends to investors, leaving little left over for debt repayment or funding capital spending. Capita’s financial situation is similarly troubling. Over the past five years, the company has paid out around £700m more in dividends to shareholders than it has generated from operations after deducting capital spending and other investing cash outflows.

A better investment 

These problems lead me to conclude that, despite the fact that these shares look cheap, the industry is still plagued by problems, and it will take some time for these companies to turn themselves around if they can convince their creditors to give them breathing space. Overall, the risk/reward ratio just does not look attractive here. Plenty could go wrong for Interserve and Capita as they struggle to return to growth and it may be many years before investors see a return. There are other better opportunities out there.

The post Is it now time to buy Capita plc and Interserve plc after falling 60%? appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

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.

The combined effect has been to pummel Capita (LSE: CPI) shares even harder, and we’re looking at an 85% price crash since a peak in July 2015. In fact, Capita shares haven’t been as low as this since the start of 2003.

What’s going to happen next? A promising recovery play, or the same risk that I think I’m seeing in sector rival Interserve?

I don’t like the look of Capita’s current liquidity one bit. At 30 June, net debt stood at £1.6bn, and the company told us that “adjusted net debt-to-adjusted EBITDA at 30 June 2017 is 2.86.” That’s not good, especially as free cash flow had fallen by 16% since a year previously, to £179m, even while adjusted pre-tax profit was up 46%.

In fact, that debt-to-EBIDTA is worse than Interserve’s at the same time, which reportedly stood at 2.5 times. And that’s a company about which the government is apparently worried and which its experts are closely watching.

Capita decided to maintain its interim dividend at 11p per share at the time — and that’s after several years of rises, during which time the hole it is in was getting deeper. I don’t understand companies that keep paying dividends while debts are mounting and cash flow is weak.

New start?

Thankfully that mistake was rectified by new boss Jonathan Lewis, who has plans for transforming the company. An update on 31 January told us that “Capita has commenced a multi-year transformation programme and is committed to delivering a strategic review of the Group during 2018.” Part of that is a suspension of the dividend until the firm can achieve sustainable free cash flow.

To get the balance sheet back in order, there are also going to be some non-core disposals, and there’s a rights issue planned for 2018 to raise some much-needed cash. Quite how much dilution we’ll see is not yet known, but there’s “standby underwriting in place for up to £700m.“

That’s all well and good, but I find myself asking the same questions I ponder every time I see a company getting into such a horrendously cash-strapped position. Why have they only just spotted it now and why didn’t they do something about it sooner? I don’t know the answer, but I do know that it’s the shareholders who suffer from such a blinkered approach.

The immediate result of that announcement was a further share price fall — apparently an “oh, things really are as bad as they looked” moment.

Contagion?

So is the whole sector a basket case? Not a bit of it, and to me this looks like an opportunity to invest in some depressed competitors at attractive prices.

Mitie Group (LSE: MTO) might be worth a look right now, with its shares on forward P/E multiples of around nine and falling. The share price has shed 45% since June 2017. September net debt stood at £173m, which looks manageable, and the forecast 2.5% dividend yields are very well covered.

Capita might turn itself around, but with P/E ratios of around five, a lot of investors are pricing the shares to go bust. I hope I’m wrong, but I’m not buying.

The post Should you snap up Capita plc after 50% slump? appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Alan Oscroft 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.

So far, the City’s analysts have not lowered their consensus forecast for the dividend, and if the mooted payments of more than 31.5p pencilled in for this year and next actually come to pass, we’ll be looking at yields of around 6.6% on the current 471p share price.

The 27% crash in the share price since 20 September has also dropped Capita’s prospective P/E multiples for the next two years to under 10 — and if the market has over-reacted to the firm’s troubles, then the shares could well be oversold and good value now.

More bad news to come?

I’m tempted by that thought myself, but I’m held back by my recollection of thinking something similar about Carillion after its big shock in July, only to see yet another profit warning sending the shares plunging further this month.

But back to that dividend. Part of Capita’s recovery strategy, necessitated by a big fall-off in significant contract wins and a drop in its bid pipeline, is to engage in a cost-cutting programme to try to support profits. And a company doing that, to me, should not be paying out high dividends.

I think those who believe this is just a very short blip and that recovery will be rapid could be disappointed, and I really can see a high chance of a dividend cut.

Bigger and more reliable

I’m more firmly drawn to a dividend yield that is both bigger than Capita’s and, in my opinion, a safer bet. I reckon I’m seeing that from Crest Nicholson Holdings (LSE: CRST) with its currently forecast yield of 7% for the year to October 2018, and what I see as a strong future for the UK’s housing sector.

I actually think the entire housebuilding sector is paying very attractive dividends which I think will be sustainable in the long term, but Crest Nicholson’s has been one of the most stunningly progressive of the past few years.

In 2013, the company paid out 6.5p per share, more than doubling that the next year to 14.3p, and then building it as high as 27.6p in 2016 (and that was covered 2.25 times by earnings). Two more years of predicted rises would take the annual payment to around 37.2p by 2018, for a 5.7-fold multiplication in just five years.

Growth too

The share price has almost doubled over the same period, to 509p. On top of that obvious benefit, what it also means is that if you’d bought shares five years ago at around 255p, you’d be set to enjoy an effective yield on your purchase price of nearly 15% in 2018 if forecasts are accurate.

The company has already committed to 2 times cover for the 2017 year just ended, though we are seeing a reduction in cover — in 2015 it came in at 2.5 times. The future rate of dividend growth has to fall off as the firm reaches a sustainable cover level, but I’d be happy for it to just keep ahead of inflation over the long term — and I can see it remaining significantly better than that for some time yet.

The post Why I’d buy this 7% dividend yield instead of Capita plc appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Alan Oscroft 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.

At first glance, fallen star Capita (LSE: CPI) looks to be a great dividend stock. City analysts are calling for the company to pay a dividend of 31.7p per share for 2017, giving a current yield of 5.5%.

With earnings per share of 50p also projected, the shares look cheap trading at a forward P/E of 11.4. 

However, even though Capita might look like an attractive dividend investment on the face of it, I believe that the company has nothing on another dividend champion, which currently offers investors a yield of 6%. 

The market’s best income stock? 

Kier (LSE: KIE) flies under the radar of most investors, but that doesn’t mean you should ignore this opportunity. 

As a leading UK building and civil engineering contractor, which also specialises in private house building, Kier’s fortunes are tied to those of the UK economy. And right now, business is booming. 

At the end of September, the group reported underlying pre-tax profit growth of 8% to £126m, on revenue of £4.27bn, up 5% year-on-year for the fiscal year ending 30 June 2017. Meanwhile, the acquisition of engineering services provider McNicholas in July boosted the order book to £9.5bn from £8.9bn and made it a top-three player in the utility sector.

City analysts are expecting further growth next year. Earnings per share growth of 11% has been pencilled in for the financial year ending 30 June 2018. These forecasts indicate that the shares are trading at a forward P/E of 9.4. More importantly for income investors, the shares yield 6.4%. 

Struggling to recover 

As Kier grows, Capita struggles. Last month, the company reported that its bid pipeline shrank to £3.1bn, from the £3.8bn in March, with £403m of significant contract wins in the period – less than half compared to the same period last year, as the contract win rate fell to 1-in-2 from 1-in-3. For the first six months, reported revenue declined 1% and at the reported level, profit before tax shrank 25% to £27.6m. 

According to management, full-year pre-tax profits will be supported by cost-saving initiatives, which are expected to produce a net benefit of £57m by the end of next year. However, management has also warned that some trading businesses were “not improving as quickly as expected“, which is likely to slow recovery. 

The bottom line 

All in all, Capita’s falling win rate and declining revenues indicate to me that the company might not return to its former glory for some time. This is bad news for dividend investors. While there may be no immediate threat to the payout, dividend growth may remain elusive for the foreseeable future. 

On the other hand, as long-term income play, Kier looks to be the better buy. The company’s prospects are bright, which indicates to me that the payout will grow in the years ahead. Also, the stock is currently inexpensive, and the yield on offer is nearly double the market average. 

The post Why I’d avoid Capita plc and buy this 6% dividend yield instead appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

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.

As sales have surged, so have profits as the company benefits from economies of scale. For 2013, the firm reported a pre-tax profit of £10.2m. For 2017, analysts have pencilled in a pre-tax profit target of £139m up 1,263% in five years (earnings per share have grown 1,107%) over the same period. 

Investors have been (and still are) willing to pay a premium to be part of the growth story. Shares in the group currently trade at a forward P/E of 37.7, which might seem expensive, but compared to projected earnings growth of 38% for 2017, the multiple seems appropriate. 

And I believe shares in Just Eat could have further to run as it continues to expand and consolidates its existing position in key markets.  

Slowing growth 

Just Eat has attracted some criticism recently as its growth rate has slowed. For the first quarter, the company reported a 25% year-on-year rise in total orders to 39m, although while many managements would kill for this kind of growth, it was the lowest recorded by the takeaway platform since 2014. 

Still, it was always going to suffer slowing growth at some point. No company can continue to raise revenue by 50%+ per annum forever, it’s just not possible. Nonetheless, as the firm consolidates its market position, refines its offering to customer and suppliers, and streamlines its operations, profits should continue to improve, albeit at a slower rate of growth than in the past.  

A better investment 

Even though the company does not offer investors a dividend, in my view, Just Eat is a better buy than struggling former income champion Capita (LSE: CPI). 

Shares in Capita currently yield 4.9%, and the company’s management is working hard to ensure that the payout is sustainable by selling off non-core divisions to pay down debt. This is a short sighted strategy. Selling off businesses and under-investing in growth really caps future growth potential. 

As Capita rushes to shrink its business to keep its dividend, Just Eat is flush with cash, which management can use to invest in growth. When there are no more opportunities for growth, the company can start to return cash to investors. 

The growth outlooks for these two companies differ significantly. Capita’s earnings per share are projected to decline by 8% this year, before rising slightly by 4% next year. This lacklustre earnings growth justifies a low valuation. Shares in Capita currently trade at a forward P/E of 13, which seems about right for the company’s near-term prospects. However, over the next decade, the outlook for the firm is more uncertain. 

The bottom line 

Overall, Just Eat looks to me to be a better buy than struggling Capita. As the latter shrinks itself to fund the dividend, management is constraining growth. On the other hand, Just Eat still has a long runway for expansion ahead of it. 

The post Why I’d avoid this struggling turnaround stock and buy Just Eat plc appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

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