One FTSE 100 dividend champion I’d sell to buy this monster growth stock

Rupert Hargreaves — Thu, 22 Mar 2018 12:55:24 +0000

Over the past 12 months, Rio Tinto (LSE: RIO) has emerged as one of the FTSE 100’s top income stocks.

At the beginning of February, the company rewarded its shareholders with the biggest dividend it has ever paid, as well as a share buyback programme. Together these two cash returns totalled $6.2bn, around two-thirds of the group’s full-year 2017 earnings of $8.6bn.

This dramatic turnaround comes several years after Rio was forced to slash its dividend due to falling commodity prices and rising debt. Ever since, management has been working hard to get the company’s house in order, and it now looks as if this transformation is coming to an end. At the end of last year, net debt had fallen to $3.8bn, from $9.6bn at the beginning of the year, while free cash flow surged 60% to $9.5bn.

Uncertain dividends

Lower costs, as well as higher commodity prices, helped Rio throughout 2017. Overall, higher commodities prices added more than $4bn to underlying earnings. Without this boost, Rio certainly wouldn’t have been able to announce a record distribution. The company has committed to paying out between 40% and 60% of underlying earnings to investors via dividends, so payouts will vary from year to year.

The miner’s total dividend per share for 2017 was $2.9, or 210p, a dividend yield of roughly 5.6% at the time of writing. City analysts are currently expecting the company to announce a similar level of distribution for 2018. But in 2019, based on current iron ore price forecasts, the distribution is set to fall by around 10%.

And this dependence on iron ore prices is the key reason why I’m cautious about the outlook for Rio. The company is a dividend champion today, but if prices suddenly fall, as they did between 2013 and 2015, the dividend will fall as well.

With this being the case, I’m much more positive on the outlook for small-cap growth stock Cello (LSE: CLL).

Market leader

Cello provides marketing services to healthcare companies, a business which is online likely to see demand expand over time. Today, the company reported an increase in profit before tax of 11.9% for 2017 and statutory basic earnings per share of 4.09p, up from 3.2p for 2016. Headline earnings per share hit 7.9p.

Growth is the key reason why I like Cello over its blue-chip peer Rio. While Rio’s growth is tied to the price of iron ore, Cello’s future is in its own hands. The company is leveraging its position in the healthcare industry to reach out to more clients and the firm now has relationships with 24 of the top 25 pharmaceutical companies. A total of 49 new client wins in 2017 is a testament to the group’s offering and service to customers.

As management builds on this success, City analysts are expecting earnings to grow steadily by around 10% over the next two years. True, this doesn’t make the firm the fastest growing business around, but Cello’s offering to the highly defensive healthcare industry, which requires specialist knowledge, implies the company is unlikely to be displaced anytime soon. So this steady growth should continue for many years to come, in my opinion. With this being the case, Cello’s valuation of 13.9 times forward earnings, doesn’t appear too demanding.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 small-cap stocks that look set to soar

Alan Oscroft — Wed, 22 Mar 2017 14:21:06 +0000

Growth shares come in many guises, but a focus on the next five years can be critical to longer-term success.

Gambling success

What do you think when you see a share that has five-bagged over the past five years? I’m usually torn between thinking it might have a lot further to go and wondering whether I’m too late.

Quixant (LSE: QXT) shares are up by around that amount, to 380p, including a 4% rise on the day 2016 results were delivered. The firm describes itself as “a leading provider of specialised computing platforms and monitors for gaming and slot machine applications,” and that’s clearly big business right now.

Its gaming division enjoyed a 45% rise in revenue to $53m during the year, with adjusted pre-tax profit up 23% to $11.1m.

But Quixant also has its finger in another pie after the acquisition of Densitron in November 2015, and that division also reported good things with revenue at $37.4m and adjusted pre-tax profit at $2.7m in its first full year.

Adjusted EPS gained 47% to 16.6 cents, and the dividend was lifted by a third to 2p per share. Yields are under 1% at the moment, but the company has a progressive dividend policy and cover by earnings is very strong.

The shares are on a forward P/E of nearly 27, which might look a bit high — and with EPS growth expected to drop to 25%.

I also find myself wondering about the gaming technology business — are we looking at a first mover in the latest growth stock fad and does disappointment lie ahead? Or are we really in for years of steady growth and does Quixant have sufficient competitive advantage to stay ahead of potential rivals?

But saying that, I do like Quixant’s support from its Densitron division as backup, and I’m cautiously optimistic about the next five years.

Tempting growth

Shares in Cello Group (LSE: CLL) haven’t had quite the same rocket ride, but a 176% hike in five years isn’t too shabby — and on top of that, we’ve seen dividend yields of around 3% per year over the past few years.

The pharmaceutical and consumer strategic marketing group has reported a 5.4% rise in revenue for the year to December 2016. Like-for-like gross profit was up 5.9%, though headline pre-tax profit and earnings per share were flat and net debt rose slightly to £5.1m.

But the firm was confident enough to hike its dividend by 18.9% to 3.4p, as chief executive Mark Scott said Cello is “now in a strong position to accelerate its global growth, with a particular focus on the US market.” He spoke of the company’s “Pulsar social media product continuing to grow strongly, as well as increasingly supporting the digital communications capability of Cello Health.“

Analysts have another flat year pencilled-in for 2017, but they see EPS starting to grow again by 2018. I see the firm’s two main directions — pharmaceutical sector services and web-based marketing services — as having great long-term potential, especially if the US market really can be cracked.

We’re looking at a 2018 P/E ratio of 13, which I think looks cheap if the acceleration of growth that Mr Scott suggests does come about — and I’m not seeing any reason to doubt his optimism right now. In another five years we could be looking back at 2017 as a great time to have bought Cello shares.

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