One company that could deliver improving total returns in the coming years is Centrica (LSE: CNA). It now has a dividend yield of over 8% after recording a share price decline in recent years. This could suggest that it offers a wide margin of safety and may be able to outperform the wider index in future. Alongside another stock which seems to offer good value and that reported news on Thursday, it could be worth buying, in my opinion.

Improving prospects

The company in question is industrial thread manufacturer Coats Group (LSE: COA). It announced the acquisition of ThreadSol for a total cash consideration of $12m. It’s a provider of cloud-based digital applications which enable brands, retailers and manufacturers to drive productivity gains, supply chain control, and speed to market.

The acquisition is set to support a key aspect of the company’s growth strategy which is focused on building an innovative software solutions business for the apparel and footwear industries. The initial cash outflow is $5m, with further payments of up to $7m over the period to 2022.

Looking ahead, Coats Group is expected to report a rise in earnings of 16% in the current year, followed by further growth of 8% next year. It trades on a price-to-earnings growth (PEG) ratio of 1.8, which suggests that it offers fair value for money and may be able to deliver improving capital growth in the long run.

Investment potential

As mentioned, Centrica has delivered disappointing share price performance in recent years. A combination of factors that include regulatory change, political risk and the transition to a new business model have contributed to disappointing financial performance. In turn, this has caused dividends to be cut and investor sentiment to decline.

Today, though, the stock could offer improved prospects. A dividend yield of 8.7% is exceptionally high, and suggests that it may have a margin of safety included in its valuation. At a time when the outlook for the FTSE 100 is uncertain, investors may focus increasingly on sectors that have historically showed relatively low correlation to the wider economy. Utility stocks may not have been an obvious choice during the recent bull market, but the potential for a bear market may make them more enticing to cautious investors.

Clearly, Centrica has a long journey ahead as it seeks to pivot away from its oil and gas operations. It could display further volatility and disappointment when it comes to its financial performance. But with a high yield and the potential to deliver improving operational performance through becoming more efficient, it may offer investment appeal for the long term.

The post Centrica is an 8%-yielding FTSE 100 dividend stock that I’d buy for 2019 appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Centrica. The Motley Fool UK has recommended Coats 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.

The business, a giant in the manufacture of industrial threads, was last dealing 11% higher on the day and within a whisker of January’s record tops of 90p per share. Coats’ market value has grown 60% in the past 12 months alone and there is plenty of scope for it to continue swelling.

Today the FTSE 250 giant announced that, with revenues having risen 4% in 2017, to $1.51bn, adjusted operating profit had risen 10% to $174m.

While troubles remain over at Crafts — sales here slipped 10% last year — revenues at Coats’ core Industrial division (responsible for almost nine-tenths of group sales) continue to click through the gears. It noted that here, market share grabs supported sales at its Apparel & Footwear sub-division, while bolt-on acquisitions boosted sales at its Performance Materials operations. Thus total Industrial sales rose 6% year-on-year.

The bright result encouraged it to hike the dividend 15% to 1.44 US cents per share.

More to come?

Last year’s estimate-beating numbers were not the only cause for celebration, though, as the company upgraded its profits outlook for 2018.

Indeed, chief executive Rajiv Sharma advised that “adjusted operating profits are expected to be slightly ahead of previous management expectations,” the main man citing the impact of Coats’ so-called Connecting for Growth transformation programme as well as the contribution of US-based Patrick Yarn Mill, which it acquired in December.

And brilliant cash generation provides the firepower for it to keep organic investment and M&A action on the front burner. Last year adjusted free cash flow bumped 12% higher to $87m.

Underlining the manufacturer’s rosy profits prospects, City analysts are expecting earnings to rise 7% and 9% in 2018 and 2019 respectively, figures I reckon could be subject to chunky upgrades in the months ahead given exceptional sales momentum.

So while a forward P/E ratio of 16.9 times may sit outside widely-regarded value territory of 15 times or below, I reckon the threads play is a compelling growth share to consider today.

Business is booming

Investors searching for little-known growth gems may also want to check out Gooch & Housego (LSE: GHH) right now.

The photonics specialist is expected to chalk up earnings expansion of 14% in the year to September, and a 6% advance is forecast for fiscal 2019. This leaves the business trading on a pretty toppy prospective P/E ratio of 24.9 times.

However, ripping demand for the AIM company’s wares means that this expensive rating can be forgiven. Just this week Gooch & Housego announced that “we are experiencing exceptional demand for critical components used in microelectronic manufacturing,” a scenario which has driven its order book to record levels (to £89.7m as of the end of January, up 48.4% year-on-year).

Like Coats, Gooch & Housego has also seen its share price gallop over the past year, up 15% in the period. I fully expect it to continue flying as the firm upgrades capacity to meet rampant demand.

The post 2 secret growth stocks to watch in 2018 and beyond appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Gooch & Housego. 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 group is one of the world’s largest industrial thread manufacturers, producing threads for use in products such as clothing, footwear, furniture and the automotive industry.

It announced another acquisition today, aimed at expanding its range of specialist products. Patrick Yarn Mill specialises in cut-resistant and flame-retardant yarns and generated sales of $36.5m in 2016. Coats will pay $21-25m to acquire the business, dependent on its performance over the next three years.

Buy, sell or hold

I own shares of Coats myself. They’ve been a profitable investment for me over the last eight months. But I think the strong trading and pension settlement which drove the stock’s rapid gains may now be reflected in the group’s share price.

Looking ahead, analysts expect the group to report earnings of 6.2 US cents per share for 2017, a 26% increase on 2016. However, expectations for 2018 are more modest, with City brokers pencilling in earnings growth of just 7.5%. Although acquisitions like today’s deal may help to nudge this total higher, it seems to me that Coats’ growth is now likely to be slow and steady, rather than fast and furious.

With this in mind, I think the stock’s 2018 forecast P/E of 17.2 may be high enough. Next year’s dividend is only expected to provide a yield of 1.7%, well below the 2.7% average for the FTSE 250.

Holding onto this stock could still make sense for committed long-term growth investors, but personally I’m starting to think about taking profits in order to invest in more attractive opportunities elsewhere.

One miner I might buy

Copper mining group Antofagasta (LSE: ANTO) hit a 52-week high of 1,071p earlier this year. But the stock has pulled back by around 10% to just over 900p. In my view this could be an opportunity to buy shares in this Chile-based miner.

Before the mining market crashed in 2015, Antofagasta generated operating margins in excess of 30%. The firm’s mining costs were relatively low and it generated a lot of surplus cash. Although margins fell sharply in 2015, they are already recovering. Over the last 12 months, the group has achieved an operating margin of 19%. I think that further gains are likely over the next year.

Perfect timing

Antofagasta’s historically high margins and strong cash generation enabled the group to make a major acquisition during the mining downturn. Although this deal left the group with net debt of more than $1bn, this has already fallen to around $850m. This looks pretty insignificant to me, given that the firm is expected to report an after-tax profit of $647m for 2017.

The price of copper has risen by around 14% over the last year. Demand is expected to remain strong in the future for this relatively scarce asset.

As the benefits from Antofagasta’s expanding mine assets feed through to the firm’s earnings, I expect significant dividend growth. Trading on a forecast P/E of 17 with a prospective yield of 2.3%, I think the stock offers decent value.

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Roland Head owns shares of Coats Group. 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.

Unique position for growth 

Today’s results also showcase its unique position. Group sales for the period from 1 July to 31 October 2017 grew 2% year-on-year, driven by a strong performance in the industrial division, which saw sales expand 5%. Excluding the US crafts business, overall reported sales grew 5-6%. Reported crafts revenue declined 12% during the period. 

Despite those headwinds in the craft division, management still expects the firm to hit City earnings targets for the year. Analysts are projecting earnings per share of 4.9 for the full-year, putting the company on a forward P/E of 17.7. While this multiple might seem expensive, I believe it undervalues the business for two reasons. 

Firstly, Coats dominates its market and second, the business generates a return on capital employed — a measure of how much profit the company produces for each £1 invested — of 30%-plus. Only a handful of business are this productive. Indeed, this ratio indicates that the company’s book value will double every 2.5 years and if management doesn’t decide to reinvest, shareholders will benefit. 

At present, the shares only yield 1.4%, but the payout is covered four times by earnings leaving plenty of room for further growth. 

Coats is undoubtedly one company I want to keep an eye on.

Growing in a hostile environment 

As well as Coats, I’m highly optimistic about the outlook for Ted Baker (LSE: TED). Over the past five years, shares in the fashion and lifestyle retailer have risen 170% as the company has defied the broader retail sector woes. And it’s showing no signs of slowing down. 

According to the firm’s latest trading update, revenue rose 7.3% year-on-year for the 13 week period from August 13 to November 11, despite “challenging” trading conditions. Total retail sales jumped 19% mostly thanks to a 30% rise in online sales and 14% increase in wholesale revenues. 

Ted Baker now anticipates low double-digit wholesale sales for the full-year having said in July it was expecting to achieve high single-digit growth. 

Bucking the trend 

At a time when the majority of the UK retail sector, especially in fashion, is struggling, the fact that Ted continues to report double-digit sales growth is a testament to its customer appeal and business model.

Although its shares might not be cheap, I believe that there’s still room for further growth in the years ahead. Based on analyst projections, the shares trade at a forward P/E of 21.2 for the year ending 31 January 2018 and yield 2%. The payout is covered twice by earnings per share, and annual double-digit earnings per share growth is projected for the foreseeable future. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Ted Baker plc. 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 fact, reporting on Monday was a dividend growth stock which declined by over 15% due to a profit warning. Could now be the right time to buy it?

Difficult period

The company in question is international performance materials group Low & Bonar (LSE: LWB). The company’s Civil Engineering business experienced difficult trading conditions in the second half of the financial year. Although year-on-year revenue has moved higher, demand for higher value specification products has been subdued. This has resulted in an adverse sales mix. This has meant that the division is not expected to make a profit for the year, with management set to review its future.

Despite this, the company’s other divisions are continuing to perform relatively well. For example, the operational issues in Coated Technical Textiles are now behind the business, while Interiors & Transportation’s solid performance has continued. The company’s Building & Industrial business unit has also performed as expected during the second half of the year.

With Low & Bonar now having a dividend yield of 5%, it appears to offer greater income appeal following its share price fall. Since dividends are covered more than twice by profit, there is still scope for a fast pace of dividend growth over the medium term. Therefore, while its near-term future may be relatively uncertain, it could prove to be a sound buy for investors seeking strong dividend growth stocks.

Dividend growth

Also offering upbeat dividend growth potential is industrial thread manufacturer Coats Group (LSE: COA). The company has been able to post a rise in its bottom line of 60% over the last two years, and this means it now has greater scope to increase dividends at a rapid rate. The company’s dividend coverage ratio is now over four times, and this suggests that it could become a sound income play over the medium term.

Although Coats Group has a dividend yield of just 1.3% at the present time, it is forecast to increase dividends by over 15% in the next financial year. Since its bottom line is due to rise by 10% next year, such a rapid growth in shareholder payouts appears to be highly affordable and does not put the company’s financial future under pressure.

With the company trading on a price-to-earnings growth (PEG) ratio of just 1.8, it seems to have capital growth potential. This mix of improving financial outlook, low valuation and dividend growth prospects could make the stock appealing to investors at a time when inflation is moving upwards and the FTSE 100 is at a record high. As such, now could be the perfect time to buy it.

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Peter Stephens 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.

Coats has now risen by 133% over the last year. That’s not bad for a 250-year old business which makes threads for footwear manufacturers and other more specialist applications. It shows that you don’t need to focus on high-risk growth stocks in order to beat the market.

The group describes itself as “the world’s leading industrial thread manufacturer” and had sales of nearly $1.5bn in 2016. According to today’s statement, revenue rose by 5% at constant exchange rates during the first four months of the year. Management now expects full-year results to be “ahead of previous expectations”.

What’s changed?

If you look at Coats’ share price graph for the last year, you might wonder why the firm’s shares rose by 44% in one month during December. The answer is that Coats managed to negotiate a settlement with the Pension Regulator, regarding two of its historic final salary schemes which carry large deficits.

In return for additional funding of £329.5m by 2021, the body agreed to cease regulatory action against the two schemes. This resolution seems to have coincided with a decent upturn in Coats’ performance, with adjusted earnings up 23% to 4.91 cents per share last year.

After Wednesday’s news, I estimate that the stock trades on a forecast P/E of about 11.2. Although the forecast dividend yield of 1.6% is quite low, I think there’s scope for medium-term growth which could reward patient shareholders.

A premium approach

Restaurant and pub group Mitchells & Butlers (LSE: MAB) was one of the biggest losers on Wednesday morning, falling 7% after reporting a 10% drop in pre-tax profit.

The group — whose businesses include All Bar One and Toby Carvery — said that pre-tax profit had fallen by 9.6% to £75m during the 28 weeks to 8 April, despite a 1.6% increase in like-for-like sales. Phil Urban, chief executive, says that “wage inflation, property costs and exchange rate movements” were to blame for lower profit margins.

To combat these rising costs, it is upgrading some of its sites, placing an increased emphasis on “premiumisation”. In other words, the group is trying to encourage people to choose more expensive food and drink options.

There’s some evidence this approach is working. Average spend per food item rose by 5.9% during the first half, while the average cost per drink rose by 4.2%. The only problem is that these gains were accompanied by falling volumes of both food and drink sales.

Mitchells & Butlers needs to find a way of pushing through premiumisation without losing too many customers along the way. This could be a challenge, but it’s worth remembering that this group also has a £4.4bn property portfolio. My calculations suggest that this gives it a tangible net asset value of 360p per share.

At 257p, it is trading at a 28% discount to net asset value. Rival Punch Taverns was recently taken over. If Mitchells & Butlers’ discount continues to grow, I could see this group becoming a potential bid target too. In the meantime, the stock’s 2.8% yield looks well covered by earnings.

The post Why these income growth stocks could fund your retirement appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Roland Head owns shares of Coats Group. 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.

Solid telecoms

My first pick is KCOM Group (LSE: KCOM), which serves the Hull and East Yorkshire area, while providing domestic and business telecoms. This actually isn’t one I’d overlooked, as I’ve had my eye on it for some years. The share price hadn’t really gone anywhere much over the past decade, but at 90.5p as I write it’s doubled over the past 12 months.

EPS is forecast to drop this year and next, before stabilising, as the firm is restructuring to simplify its branding and operations. With first-half results, chief executive Bill Halbert said that “capital expenditure is likely to peak over this year and the subsequent year” as the firm’s fibre network is rolled out.

The key attraction for me is KCOM’s dividend, which is expected to yield 6.7% this year. It will be barely covered, but Mr Halbert promised us 6p per share for this year and next, and I can see KCOM maturing into a desirable cash cow.

Power to India

OPG Power Ventures (LSE: OPG) is one I didn’t really know, but I’m intrigued by what I see. The shares have fallen over the past couple of years, to 61p, but that gives us a prospective P/E ratio of only 7.5 for the year to March, and if growth forecasts come good, we’ll see that dropping as low as five by March 2019.

A PEG ratio of just 0.1 this year, rising only as far as 0.3 over the next two years, also puts the shares firmly into the range that growth investors look for — anything under 0.7 is typically seen as a good sign.

But what does it do? OPG develops and operates power plants in India, and first-half results released in December suggest we could be at a transition point. Revenue more than doubled, EPS rose by 41%, free cash flow came in at £20.6m, and gearing came down to 55% (from 58% six months previously). That led the company to declare its maiden dividend — only 0.26p per share, but it’s a healthy start.

I’ll need to investigate further, but OPG looks promising to me.

Cash from fibre

Shares in industrial thread manufacturer Coats Group (LSE: COA) have soared since September, to 60p, taking them up 170% over the past 12 months.

An October trading update told us that earlier “challenging market conditions” are improving, and that 2016 operating profit should be ahead of previous expectations — the results should be with us on 24 February. And after having been stopped in 2012, the dividend should be back this year — only a 1.4% yield, but it should be subsequently progressive.

The falling pound has helped Coats too, making its exports cheaper. And the firm has very little exposure to the EU, so Brexit shouldn’t really be a problem.

News that the UK Pensions Regulator will cease regulatory activity regarding two of the company’s pension schemes also gave the shares an extra boost, in December.

Even after this year’s gain, we’re still only looking at a P/E based on 2017 forecasts of 10.4, dropping to 9.5 next year. Definitely worth a closer look, I say.

The post 3 attractive small-cap stocks for less than a pound 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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.