Naturally, there’s plenty of brilliant buys trading for next-to-nothing on the FTSE 250 right now as well. And in this article I plan to discuss a couple of them: Ted Baker (LSE: TED) and Elementis (LSE: ELM).

Ted talks

Ted Baker can currently be found languishing at levels not seen since the summer of 2014, the waves of risk aversion that battered October meaning that the fashion/lifestyle retail star has conceded around 43% of its value since striking the year’s highs above £32 per share in March.

The deteriorating condition of the UK retail landscape that has prompted investors to frantically sell Ted Baker was borne out in half-year numbers earlier this month, in which the business declared that the collapse of department store House of Fraser caused pre-tax profit at group level to duck 3.2% during the 28 weeks to August 11, to £24.5m.

Other parts of the release caused room for celebration, however. I’ve lauded the exceptional progress the retailer is making in cyberspace and the latest release confirmed this trend, with e-commerce revenues exploding 24.1% in the first fiscal half.

With the business also continuing its global expansion drive — it opened an extra nine stores across Europe and the US in the six-month period — it’s hardly a shock that City analysts are forecasting its long history of earnings growth to carry on, with advances of 6% and 9% for the years to January 2019 and 2020, respectively.

And this means Ted Baker is anticipated to keep its ultra-progressive dividend policy rolling, too (indeed, the business hiked the interim dividend 7.8% to 17.9p per share on the back of this). Right now, City analysts expect last year’s payout of 60.1p to rise to 65.5p in the present period, and again to 72.5p next year. Consequently, yields for these years sit at a chubby 3.6% and 4%, respectively.

The recent share price weakness at Ted Baker also means that it carries a forward P/E rating of 13.6 times, comfortably inside the value terrain of 15 times and below.

Chemicals fix

Another recent faller from the FTSE 250 that value chasers need to check out is Elementis (LSE: ELM), the chemicals company sporting a prospective earnings multiple of just 14.1 times.

October’s selling frenzy means that it trades at depths not visited since the summer of 2016. This comes despite Elementis advising in a reassuring third-quarter trading statement in recent days that “demand remains strong with supportive pricing momentum expected in 2019.”

Reflecting this favourable backdrop, City brokers are predicting that earnings will rise 7% in 2018, and 10% in 2019. Thus the number crunchers are expecting that dividends will keep rising, and a 9 US-cent-per-share reward is forecast for this year, with a 9.7-cent one for 2019. Yields thus stand at an inflation-trumping 3.3% and 3.6% for these respective years. As profits rise and booming cash flows drive down debt, I’m expecting dividends to keep on impressing.

The post 2 cheap FTSE 250 dividend stocks at multi-year lows that I’d buy right now 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Elementis and Ted Baker. 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.

Against this backdrop, companies such as Tullow Oil (LSE: TLW) may now offer good value for money. The company appears to have improving financial prospects which could lead to a rising share price over the medium term. However, it’s not the only FTSE 250 share which could be worth buying at the present time.

Improving prospects

Reporting on Thursday was speciality chemicals company Elementis (LSE: ELM). It released a third quarter trading update which showed that it has delivered resilient performance, being on track to perform as per previous guidance.

In its personal care division, sales to direct customers of its high-margin hectorite-based products continue, while in its coatings division its transformation programme has made progress. Activity levels in its energy segment improved, being driven by new business and early signs of a recovery in deep water drilling. In its chromium segment, the company’s production has been disrupted due to Hurricane Florence. However, demand has remained strong.

Looking ahead, Elementis is forecast to post a rise in earnings of 10% in the next financial year. With the company’s shares trading on a price-to-earnings growth (PEG) ratio of 1.7, they appear to offer a margin of safety. With the overall performance of the business being relatively sound and it having what appears to be a logical growth strategy, its overall investment prospects appear to be improving.

Volatile outlook

The prospects for Tullow Oil appear to be relatively uncertain at the present time. There is a general concern among investors that the world economy will experience a slowdown in its rate of growth. This could be caused by a rising US interest rate, or by tariffs being placed on imported goods by the US and China. Either way, investor sentiment has weakened significantly in recent weeks, and this trend could continue over the near term.

The oil and gas sector, though, may be supported by geopolitical risks across a number of OPEC nations. Saudi Arabia has been in the spotlight of late, with sanctions being a possibility. Iran and Venezuela are already facing the prospect of supply disruption, and when taken together this could cause supply growth to fall behind demand growth for oil – even in a weaker world economy.

As such, Tullow Oil could enjoy favourable oil prices over the medium term. The company is expected to post a rise in earnings of 11% next year, with its shares trading on a PEG ratio of 1. This suggests that investors have not yet factored in its improving financial outlook, and that there could be capital growth potential on offer.

The post Think the Tullow Oil share price is a FTSE 250 bargain? Read this now appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares of Elementis. The Motley Fool UK has recommended Elementis. 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 its element

FTSE 250 chemicals specialist Elementis (LSE: ELM) is making a splash this morning, its share price up 6.23% on publication of its AGM trading statement headlined “Solid start to the year, confident of further progress in 2018”. The group’s Personal Care division, which manufactures hectorite-based products for the cosmetics market, is enjoying growth across new product categories and geographies. I find this particularly encouraging because although it makes up less than 10% of the business, it enjoys higher margins.

Its Coatings operation is expanding in EMEA and the Americas, with a steady performance in Asia, while its Energy division remains solid despite strong comparatives. Chromium is recovering after exceptional weather conditions at the group’s Castle Hayne plant knocked Q1 output.

Chemicals brothers

Today’s brief statement noted that strong free cash generation continued in Q1 while net debt reduced, helped by the disposal of its Surfactants business in March. “Our financial platform is robust and supportive of future growth and continued shareholder value creation,” the £1.39bn group added.

Elementis is one of the UK’s largest speciality chemicals and personal care businesses, with extensive operations in the US, Europe and Asia. City analysts reckon its earnings per share (EPS) will grow a healthy 13% across 2018, then another 9% in 2019. By then, the yield should climb to 2.6%, which is solid but not extravagant. However, my Foolish colleague Peter Stephens recently noted that Elementis pays out just 43% of profits to shareholders, and could increase this percentage as profits grow. Today’s 2.4% yield is covered 2.2 times, which also suggests scope for progression.

However, I am not the first to spot its potential, Elementis is currently trading at a slightly toppy forecast valuation of 19.5 times earnings.

Information is power

Global information and analytics company Relx (LSE: REL) has had mixed fortunes lately, suffering a 17% share price drop in the autumn. The group was punished by adverse currency movements, a slew of broker downgrades, and worries around its scientific information division, but the response may have been overdone and investors may still have a buying opportunity here.

Relx is a subscription-driven business with a stable customer base across the scientific, legal and insurance markets, giving it strong and steady cash flows. EPS growth looks set to slow after four rampant years but should still clock in at 4% this year and 5% in 2019. By then, the yield should have climbed to a solid 2.9%. Covered two times, there is scope for dividend progression here as well.

Time to Relx

Earlier this month, management reported that year-to-date business trends remain consistent with full-year 2017, while the business is enjoying organic development, and has also completed four acquisitions totalling £668m. It completed £325m of the previously announced £700m share buyback, with the remainder due this year.

Recently patchy share price performance may suggest the company is a victim of its own success, but the sell-off has trimmed its toppy valuation to 18.6 times earnings. Relx is still a little pricey, but a better deal than before.

The post One FTSE 100 and one FTSE 250 growth stock I would buy with £2,000 today appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Elementis and RELX. 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.

Despite this, there are still some dividend growth stocks which could be worth buying for the long run. Here are two prime examples that may be worth a closer look.

Improving performance

Reporting on Tuesday was FTSE 250 chemicals specialist Elementis (LSE: ELM). The company was able to deliver revenue growth of 27% in the 2017 financial year, with strong organic revenue growth of 11%. Its adjusted operating profit moved 32% higher during the period, with gains seen across Specialties, Chromium and Surfectants.

Its growth strategy appears to be having a positive impact on its overall performance. A portfolio transformation is continuing according to its plan, developing a more focused and higher quality business. Further strategic momentum is anticipated in 2018, which could have a positive impact on its share price.

While a dividend yield of 2.4% may lack income appeal at present, growth prospects here appear to be highly enticing. It pays out just 43% of profit as a dividend, which suggests that it could raise the return at a faster pace than profit without hurting its financial standing. And with its bottom line due to increase by 11% this year, its current strategy could lead to a high total return in the long run.

Turnaround potential

The last couple of years have been incredibly challenging for Royal Mail (LSE: RMG). The company has seen investor sentiment decline severely, with its share price moving lower resulting in a relegation from the FTSE 100. Investors seem to be concerned about the risks facing the business in terms of strike action and political risk.

However, the stock has been able to deliver a sharp turnaround in recent months. Its shares have gained nearly 50% in less than four months. One reason for this recovery could be the continued delivery of the company’s strategy, with its international operations offering growth potential and its efficiency drive in the UK making it more competitive.

So the prospects for the business appear to be bright, with demand for parcel delivery in the UK continuing to remain robust. This is expected to contribute to a rise in the company’s bottom line in both the current year and next year. And with dividends being covered 1.7 times by profit, there seems to be scope for them to rise over the medium term.

Certainly Royal Mail may not be the most exciting stock in the FTSE 250. However, with a 4.5% dividend yield which could grow by at least as much as inflation, it could prove to be a solid income stock for the long term.

The post 2 FTSE 250 dividend growth stocks I’d buy with £1,000 today 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares in Elementis. The Motley Fool UK has recommended Elementis. 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 share price of speciality chemicals manufacturer Elementis (LSE: ELM) is up nearly 4% today on the back of a strong Q3 trading update from the firm. And while a single quarter doesn’t mean much in the long term, I believe the company is one stock to own for many years to come.

The key for Elementis is a leading position in the science of rheology, which simply means control over viscosity and thickness. Without the speciality chemicals the company has expertise in, paint would have the consistency of water. This means its chemicals pop up in everything from homes to oil fields and ships’ hulls.

But where I see truly impressive long-term growth potential is for its output to be placed in more personal care/grooming products such as make-up. Earlier this year it spent $360m on its smaller rival SummitReheis that specialises in just such personal care applications. This immediately lent it significant scale and expertise in a part of the chemicals sector that is growing across the world and is also less cyclical than its traditional core oil & gas market.

This acquisition is already paying off with management mentioning “good revenue performance” in Q3 that was hopefully in line with the 24% sales growth posted in H1. There’s also strong potential for the company’s 16.2% adjusted operating margins to rise as recent investments begin to pay off and cost savings are found in the recently-acquired business.

With the oil & gas industry rebounding, long-term potential in its growing personal care business and plenty of scope to improve margins, I think Elementis could be a great growth stock at an attractive price of 18 times forward earnings.

Growing sales and margins 

A second growth stock I like for the long term is quality assurance tester Intertek (LSE: ITRK). Through organic growth and bolt-on acquisitions the company has made itself into a globe-spanning organisation with over 1,000 offices in 100 countries. They provide companies with the assurance that their products and resources meet regulatory standards and perform as expected.

In the six months to August, the group’s revenue rose 2.7% in constant currency terms to £1,371m due to organic growth of 1.7% and the addition of some small acquisitions. This may not seem that impressive, but it truly is as revenue from the company’s resource division was down 12.3% in constant currency terms to £247m due to continued weakness in the commodities and oil & gas sectors.

Of course, cyclicality in these sectors is to be expected, which is why management is focusing growth on the more reliable products division that certifies everything from shoes to consumer electronics and pharmaceuticals. This division is already the group’s largest by revenue and profitability as its 20.5% adjusted operating margins are well ahead of the group average.  

This will be the key market for Intertek going forward as it can grow ahead of global GDP through organic and acquisition-led methods and also has room to increase margins over time. With its share price up over 50% in the past year, it is not cheap at 27 times forward earnings, but with good sales and profit growth, I’d certainly consider buying its shares were they to pull back slightly.

The post 2 top growth stocks I’d buy and hold for the long term appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Elementis and Intertek. 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.

However, these two companies could offer surprisingly attractive risk/reward ratios due to their low valuations and high chances for growth.

Improving performance

Tuesday’s interim results from speciality chemicals company Elementis (LSE: ELM) showed it is making encouraging progress. For example, it was able to increase operating profit across all three of its main segments. Its sales growth of 24% was impressive and helped to boost adjusted operating profit by 26% versus the same period from the prior year. Furthermore, its outlook is unchanged and it remains on target to grow its operating profit across all three of its main business segments this year.

Elementis benefitted from short-term favourable conditions in Surfactants and the inclusion of the acquired SummitReheis business. Its Specialty Products division recorded adjusted operating profit growth of 18%, with strong growth in Personal Care and Energy, while Coatings saw steady revenue. The company’s Chromium division saw revenue move 18% higher, with the US resilient and there being stronger demand in the rest of the world. Surfactants were boosted by strong pricing conditions, although they are not expected to be sustained in the second half of the year. A sale of that business is now being pursued.

Looking ahead, Elementis is expected to report a rise in its bottom line of 23% in the current year, followed by further growth of 13% next year. Despite this strong outlook, it trades on a price-to-earnings growth (PEG) ratio of only 1.4. This suggests that it offers a wide margin of safety following share price growth of 8% since the start of the year and could be worth buying now for the long term.

Bright future

Also offering an upbeat investment outlook in the same sector is Johnson Matthey (LSE: JMAT). The speciality chemicals company is forecast to grow its earnings by 9% in the next financial year. Although lower than the forecast growth rate of Elementis, it has the same PEG ratio of 1.4. This suggests the sector may be somewhat undervalued by the market at the present time, and there could be growth opportunities for shrewd investors.

As well as growth potential, Johnson Matthey also has income appeal. It currently yields 2.9% from a dividend which is covered 2.7 times by profit. This suggests that dividends could increase at a significantly faster pace than profit over the medium term, without hurting the financial strength of the business. With inflation moving higher, this could increase the investment potential of the stock and make it more popular in future. The end result may be a higher share price.

The post These blue-chips could help you to achieve financial independence appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Elementis. 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.

Full of life

Diploma (LSE: DPLM) is international business supplying specialised technical products and services in the life sciences, seals and controls sectors. And it looks like a rewarding place to be, with the share price up more than 50% in the last 12 months. Over five years it has grown 156%, with its performance chart showing an impressively steady upwards climb. Full marks so far. Can its success continue?

Earlier this month, its half-yearly report revealed an impressive 21% rise in revenues and adjusted operating profits to £217.3m and £37.4m respectively, and a 29% rise in profit before tax to £32.9m. Adjusted operating margins held steady at 17.2%, while adjusted earnings per share (EPS) rose 23% to 23.9p.

Full honours

Chief executive Bruce Thompson hailed the group’s strong underlying growth, while acknowledging that it enjoyed a one-off boost from the substantial depreciation in UK sterling. He said the complementary acquisition of Abacus in April has added critical mass and opens up further growth opportunities in healthcare, while the pipeline for acquisitions remains encouraging.

The trading outlook looks positive as City analysts forecast a 15% rise in EPS in the year to 30 September 2017, followed by another 6% in 2018. Revenues and profits also look set to rise strongly. Today’s yield may look low at 1.8% but that is partly a consequence of the stock’s rapid growth. The dividend payout is nicely covered 2.1 times and management is progressive, recently hiking the interim dividend 13% to 7p per share. Investing in Diploma could prove a rewarding education, if you can accept its heady valuation of 26.73 times earnings.

Elementis, Dr Watson

Elementis (LSE: ELM) is up 44% over the past 12 months, although its five-year track record is less impressive than Diploma’s. In June 2015 the speciality chemicals company’s shares plunged 17% to 257p after it issued a profit warning. That was down to the US oil sector slump, which knocked 30% off sales of its additives used in drilling, and weaker Chinese demand for its coatings additives.

Now Elementis is bouncing back, as the US shale industry makes a vibrant comeback and the Chinese economy holds up, with the key manufacturing purchasing managers index showing growth at 51.2 for a second straight month in May.

Chemicals brothers

Elementis is a global operation that employs around 1,400 people in more than 30 worldwide locations, serving customers in North and South America, Europe and Asia Pacific. Last month’s Q1 trading statement reported stronger demand across most of its markets, with further progress expected as it remains on track to increase operating profits.

At 22.7 times earnings it isn’t cheap, although forecast EPS growth of 16% in the 2017 calendar year and 13% in 2018 largely justify that. This reverses falls of 17% and 18% in 2015 and 2016, suggesting that the company is back on track. Its well-covered dividend is forecast to hit 2.5%. The company is in its element right now, although recent volatility shows that it requires healthy demand from a buoyant global economy. Are you feeling bullish?

The post 2 exciting momentum stocks with massive potential 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Elementis. 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.

This means that mid-cap companies who depend on the oil majors for business are still under pressure. In today’s article I’m going to focus on two high quality firms which I believe could outperform expectations as the oil market continues to recover.

How cheap is this quality stock?

Specialist chemicals group Elementis (LSE: ELM) has suffered from a downturn in sales to US drilling operators. The firm said today that pre-tax profits fell by 22% to $89.7m last year. One of the main reasons for this decline was a 16% fall in energy sector sales.

Elementis warned that the outlook remained uncertain, but to my eye today’s results contained a number of bright spots. The group retained its strong balance sheet, ending the year with $77m of free cash.

Trading also improved as the year progressed. Energy sector sales rose by 15% during the second half of last year, while sales in the Personal Care division rose by 23% during the same period. Elementis is currently in the process of acquiring antiperspirant group SummitReheis, which should drive further growth in this area.

Big upside

The group’s operating margin fell from 18% to 14% last year. But if trading continues to improve in line with the performance seen during the second half of last year, I’d expect margins to rise. Profit forecasts could rise if this happens.

Elementis shares trade on a P/E of 20, with an ordinary dividend yield of 2.3%. That doesn’t look cheap, but I believe this specialist firm could easily beat market expectations over the next couple of years. It remains worth buying, in my opinion.

A top oil pick for 2017?

Shares of oil services firm John Wood Group (LSE: WG) have fallen by 15% so far this year. The group’s recent results didn’t help. Management issued a downbeat statement warning of a “cautious near-term outlook” and “challenging conditions” in the North Sea.

But although Wood Group is known as a North Sea business, the group generated about 42% of its revenue in the US and Canada last year. It reported “early signs of improvement” in the US onshore market, where drilling rig counts are starting to rise. The firm is also targeting new business in Asia and the Middle East, where it believes “the greatest opportunities” will lie in 2017.

Although Wood Group’s operating margins have fallen as a result of the oil market downturn, they haven’t collapsed. Its adjusted operating margin fell from 8% to 7.4% last year, which is still very respectable.

Net debt remains low at $349m, and I estimate the group’s dividend should be covered by both earnings and free cash flow this year. The stock currently trades on a forecast P/E of 16, with a prospective yield of 3.7%. I think Wood Group could easily beat expectations from current levels. I’d rate this stock as a buy for income and growth.

The post 2 FTSE 250 stocks I’d buy for an oil market recovery appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

On the flipside, however, this could be an ideal opportunity for new investors to jump in and grab a stake in the global satellite communications provider at a heavily discounted price, with the added attraction of an inflated dividend yield.

Weaker government spending

The FTSE 250 telecoms firm has an excellent track record when it comes to dividends, increasing its shareholder payouts every year since it was first listed on the London Stock Exchange in 2005. But shares prices don’t normally plummet without good reason, and earlier this year Inmarsat reported a 17.3% drop in pre-tax profits for 2015 amid weaker global government spending, with revenues remaining broadly flat. The company also reported a 17% fall in underlying earnings, the biggest fall since the company’s IPO over a decade ago.

In its latest trading update earlier this month, the company said it was making solid progress in challenging markets, and revealed an $18.8m increase in group revenues for the third quarter of 2016, representing a 5.8% improvement on the same period last year. But pre-tax profits came in 13.3% lower at $53.9m, a fall of $8.3m year-on-year, due to higher depreciation and financing costs.

Cuts on the cards?

I think trading will continue to be challenging, with economic and budgetary pressures affecting its customers, and City analysts seem to agree. Consensus forecasts suggest that full-year profits will shrink by another 17% this year, leaving the shares looking a little expensive at 17 times earnings. But what about the dividend? The sharp fall in the share price this year has lifted the prospective yield to almost 6%, giving income investors something to think about.

Unfortunately this forecast dividend payout is barely covered by estimated earnings, and current projections indicate that 2017 will be no better. It’s very likely that Inmarsat will continue with its progressive dividend policy for the next couple of years, but unless earnings improve dramatically, future cuts may well be on the cards.

Tough chromium business

In contrast with Inmarsat, fellow mid-cap struggler Elementis (LSE: ELM) hasn’t seen its shares punished in the same way as the satellite telecoms firm this year. In fact after a bumpy ride, the share price has recovered back to where it was a year ago. In that respect I think the shares have done pretty well considering the company’s recent poor performance.

After five years of growth, the speciality chemicals business reported a 14.12% decrease in sales for 2015, together with an 18.39% reduction in operating profit, impacted by a significant downturn in oil and gas drilling activity and the effects of a stronger US dollar. I don’t think we’re going to see much improvement this year either, as management admitted in its recent update that although sales for speciality products had improved, the environment for its chromium business
remained challenging.

Market consensus estimates are suggesting a further 20% fall in earnings for the full year on lower sales revenues, and although the prospective yield looks attractive at 5.3%, payouts are only just covered by forecast earnings. Historically, Elementis has had ample dividend cover of around three times earnings. On that basis payouts over the next few years look to be on shaky ground.

The post Why these 5% yields could be under threat appeared first on The Twelfth Magpie.

More reading

• 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?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

Don’t underestimate this firm

Underlying pre-tax profit rose by 5% to £219.6m at chemical group Johnson Matthey (LSE: JMAT) during the six months to 30 September. But this solid figure was largely the result of currency benefits. Stripping out favourable exchange rates reveals that the firm’s underlying profit fell by 3%.

I don’t think shareholders need to be concerned by the group’s minor profit dip. Johnson Matthey’s 200-year history means it can make a reasonable claim to be a long-term business. The group increased the interim dividend by 5% to 20.5p today, as a sign of confidence in its medium-term prospects.

A number of new initiatives are under way to power future growth. Perhaps most notable is the group’s battery technologies division, which is targeting electric vehicle manufacturers. Sales of battery materials rose by 16% to £72m during the first half. Johnson Matthey expects the unit to break even during the 2017/18 financial year.

Is Johnson Matthey a buy?

The group expects to meet full-year profit expectations. Current forecasts suggest adjusted earnings of 194p per share are likely this year, giving a forecast P/E of 17.2. This should fall to a P/E of 16 in 2017/18.

Johnson Matthey shares have risen by 30% over the last year, while earnings expectations have fallen slightly. This means that the stock’s valuation has risen from a forecast P/E of 13 one year ago, to an equivalent P/E of 17.2 today. This has pushed the dividend yield down to about 2.4%.

Although these shares aren’t the bargain they might have been a year ago, I believe Johnson Matthey’s track record suggests the stock remains a decent long-term buy.

Does this small stock have stellar potential?

Shares of FTSE 250 group Elementis (LSE: ELM) have risen by nearly 20% over the last six months, and by 82% over the last five years. The group’s most recent trading statement highlighted its strong cash generation. Shareholders will be rewarded with increased dividend payouts that are expected to provide a 4.5% yield this year.

Unfortunately, the underlying picture isn’t quite so bright. Although Elementis is generating cash, earnings growth is weaker than at Johnson Matthey. Earnings per share are expected to fall by 6% this year, before rising by a similar amount in 2017.

Elementis trades on a forecast P/E of 18, falling to a P/E of 17 in 2017. This valuation looks up with events at the moment. However, it has a number of opportunities for growth over the next few years. Conditions in the key North American markets of oilfield drilling and chromium may well improve, the group’s personal care division reported a 38% rise in sales during the third quarter and further growth is expected.

I believe the medium-term outlook is positive. I’m also encouraged by the group’s strong profit margins and attractive dividend yield. In my opinion, the current share price could be a reasonable entry point for long-term investors.

The post Should you sell Johnson Matthey plc and buy this smaller peer? appeared first on The Twelfth Magpie.

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