On the back of those results, the shares have crashed 20% to 103p, as I’m writing. In this article, I’ll look at the latest news and tell you what I’d do now.

I’ll also look at security firm G4S (LSE: GFS) — a fellow FTSE 250 stock I’ve bigged up on the same grounds as First — but whose trading update last week was greeted more warmly by the market, the shares moving up 3% on the day.

Delivering value

When companies separate their businesses — for example, by a demerger — they very often deliver value for shareholders. Re-energised and more focused, the performances of the separated businesses often become stronger (and their market valuations higher) than when they were yoked together.

G4S and FirstGroup are both pursuing demerger strategies. G4S is planning to demerge its Cash Solutions business, leaving it focused on its Secure Solutions division.

FirstGroup’s plans are more complex. A demerger looks on the cards for its UK First Bus division, and possibly a separation of First Rail. Meanwhile, in the US, a formal sale process is under way for its iconic Greyhound business. This would leave the group focused on North American contract-based operations, First Student and First Transit.

All going to plan

G4S’s two businesses are performing well, and its plans for demerging Cash Solutions are well advanced. It said in last week’s Q3 trading update: “The group sustained the positive organic growth momentum we saw in the first half, with organic revenue growth of 4.3%.”

Management said it expects continued momentum in Q4, and sees “good opportunities to generate further revenue growth next year and beyond.”

The company also confirmed good progress on preparations for the demerger of Cash Solutions in the first half of next year, as well as evaluating “unsolicited third-party proposals which may provide an alternative to the demerger.”

At a share price of 205p, G4S trades at 11.2 times this year’s forecast earnings. I remain confident the demerger (or potential sale at a premium price) of Cash Solutions will provide a good valuation uplift in due course. As such, I continue to rate the stock a ‘buy’.

Overdone

FirstGroup today reported a first-half statutory pre-tax loss of £187m. However, it included a non-cash impairment charge of £124m on the carrying value of Greyhound, and a £59m insurance reserve charge, due to a deterioration in the US motor claims environment leading to increased insurance costs.

More positively, group revenue increased 6.9% (4.1% at constant currency), and “all divisions delivered growth after excluding disposals and withdrawals from loss-making routes.” Management added: “We are confident in delivering our trading expectations for the full year.”

The company also said it’s progressing through the detailed work to prepare for the separation and rationalisation of its businesses, and that the formal sale process for Greyhound “is now well advanced”.

I think today’s share-price crash is way overdone, and with the stock trading at little more than seven times this year’s forecast earnings, I reckon this represents a great opportunity to buy.

The post This FTSE 250 stock just crashed 20%. Here’s what I’d do now appeared first on The Twelfth Magpie.

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G A Chester 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.

There are currently several FTSE 100 companies that are pursuing a demerger or have the potential to do so. But today, I’m looking at two FTSE 250 firms I think are similarly attractive investment propositions. The first is multinational security services firm G4S (LSE: GFS), and the second is UK and North America transport operator FirstGroup (LSE: FGP).

Unyoking

In its half-year results released earlier this month, G4S reported group revenue growth of 4.7%. It said this growth, together with new contract wins, supports its medium-term revenue goal of 4-6% per annum. Its Secure Solutions division posted growth of 4.9% and its Cash Solutions business grew 3.9%.

Alongside this decent first-half performance, and a positive outlook, the company announced the board has approved the separation of Cash Solutions from the group. It said: “As a result, we have set in train plans for the demerger of Cash Solutions in H1 2020.”

When two businesses are separated like this, we often find that each delivers improved performance, due to a number of benefits, including strategic, commercial and operational focus. In turn, this leads to a higher rating by the market than when the two businesses were yoked together.

G4S is currently valued at nine times this year’s forecast earnings. I think this gives plenty of scope for investors to enjoy a strong uplift in value, as the company pursues its demerger strategy. And with there also being potential for a high-price bid to come in for the Cash Solutions division before the demerger goes ahead, I rate the stock a ‘buy’.

All change

A similar story is unfolding at FirstGroup which, likewise, is currently rated at nine times this year’s forecast earnings. Alongside its annual numbers in May, headed by revenue growth of 5.7%, the company announced a strategy update for its five transport businesses.

It sees a future in which its core market will be North America, centred on First Student and First Transit, its market-leading contract-based businesses. Its iconic Greyhound brand has limited synergies with these businesses, and a formal sale process is now underway.

Change is also in the offing in the UK, where First Bus is one of the largest operators. Here, management is “pursuing structural alternatives to separate our First Bus operations from the group.” Also in the UK, the company has a portfolio of separately-managed rail franchise businesses. It intends to operate them “in accordance with their contractual terms,” but added: “Any future commitments to UK rail will need to have an appropriate balance of potential risks and rewards for our shareholders.”

It may take some time, but I think FirstGroup’s strategy could realise considerable value for investors. As such, I also rate this stock a ‘buy’.

The post 2 FTSE 250 stocks I’d buy in September appeared first on The Twelfth Magpie.

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G A Chester 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.

There’s no denying G4S has had a rough time over the past few years. Beset by scandals and poorly performing operations, the company has struggled to grow profits. However, management hasn’t been inactive.

CEO Ashley Almanza has been spearheading the company’s efforts to diversify into new lines of business, and improve efficiency at legacy operations. 

These efforts finally seem to be paying off. During the first six months of 2019, underlying revenue increased by 4.6% across the group, in line with the medium-term revenue goal of 4% to 6% per annum. 

Business transformation

Historically, G4S has been a business that has relied on low-paid workers to provide security solutions. But now the group is increasingly moving towards technology, where there’s tremendous scope for growth.

Revenues at the group’s technology-enabled Secure Solutions business increased by 14% across the globe during the first six months of 2019, while North American cash technology revenues grew by 33%. This impressive growth helped the firm post an adjusted profit before interest tax and amortisation of £234m for the first half, above analyst expectations.

And as part of management’s shift towards technology, G4S is now planning to separate its Cash Solutions business from the rest of the enterprise. The spin-off or demerger is expected to take place in the first half of 2020, and management is considering all options for the business, including a sale. 

Fatter profits

The divestment is part of management’s plan to turn G4S into a business focused on security and security technology. Technology-enabled solutions accounted for 46% of group revenue at the end of June, compared to 42% of the end of 2018. By divesting the cash business, this weighting should shift further towards technology. 

G4S’s shift towards technology is the reason why I believe that this stock could make an excellent investment has current levels. In the past, the group has been hamstrung by its low margin, low growth security operations. As a result, the market has never placed a high valuation on the stock. The security technology business, by comparison, offers better growth and fatter profit margins, which could lead to a re-rating of the shares. 

Double your money

At the time of writing, the stock is trading at a forward P/E of just 9.8, compared to the Professional Services Industry average of 12.1. Cybersecurity businesses can command P/E multiples of 20 or more. On top of the low valuation, shares in the security business also support a dividend yield of 5.4%. As the payout is covered 1.9x by earnings per share, it looks safe for the time being, and there’s headroom for payout growth as the business continues its transition. 

So that’s why I would buy shares in G4S today. As the company continues to realise its operations for the 21st century, I think there is a good chance the stock could jump by between 20% to 100% from current levels. 

The post Have £2k to spend? I reckon this FTSE 250 stock yielding 5.5% could make you rich appeared first on The Twelfth Magpie.

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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.

Certainly, with the index being focused on the UK there is political and economic uncertainty facing many of its members.

But when compared to the 1.5% return on a Cash ISA that is available at the present time, now could prove to be a good time to access the growth potential of a range of mid-cap stocks.

With that in mind, here are two FTSE 250 shares that appear to offer growth at a reasonable price.

Future

Global platform for specialist media, Future (LSE: FUTR), released an encouraging trading update on Monday. It reported that the positive performance it experienced in the first half of the year has continued. As a result, it anticipates that its performance for the full year will be ahead of previous guidance.

The financial outlook of the company has been boosted by strong audience growth within its Media division. It has also seen a positive contribution from recent acquisitions, while being in the process of searching for a new CFO following a change in position to Chief Strategy Officer for the current CFO.

In the current year, Future is forecast to post a rise in earnings of 16%. Despite this strong rate of growth, the stock trades on a price-to-earnings growth (PEG) ratio of just 1.3. This suggests that it could offer good value for money, and may be able to deliver further share price growth following its 118% rise since the start of the year.

G4S

Also offering an encouraging financial outlook is FTSE 250-listed G4S (LSE: GFS). The security specialist is expected to post a rise in earnings of 12% in the current year after what has been an uncertain period for the business in recent years. Since it trades on a PEG ratio of 1, it appears to be cheap relative to many of its mid-cap peers.

The company’s recent trading update showed that is has experienced strong sales wins in recent months. It is also making progress with a separation review that has the aim of creating two separate businesses in order to unlock shareholder value. This could be a sound move for the business, and could offer greater specialism and efficiency over the long run.

As well as its growth potential, G4S also has an increasingly appealing income outlook. The stock currently yields 5% from a dividend that is covered twice by profit. This suggests that there is scope for growth in shareholder payouts, which may provide an additional boost to its total return over the long run. As such, now could be a good time to buy a slice of the stock from a value, income and growth perspective.

The post Forget a Cash ISA! I’d buy these 2 bargain FTSE 250 growth stocks today appeared first on The Twelfth Magpie.

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Peter Stephens 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.

Of course, it’s not the only cheap stock that could generate higher returns than buy-to-let. Reporting on Tuesday was a FTSE 250-listed company that may also be able to offer high total returns in the coming years.

Improving prospects

The stock in question is support services specialist G4S (LSE: GFS). Its full-year results painted a mixed picture, with its Secure Solutions business delivering underlying revenue growth of 3%. The segment’s profit margins increased 30 basis points to 6.5%, with commercial discipline, productivity gains and growth in the sale of technology-enabled security contributing to its improved performance.

However, the performance of its Retail Cash Solutions segment was disappointing, experiencing challenging trading conditions. This brought the company’s overall underlying earnings growth versus the previous year to zero. As such, investor sentiment weakened following the results that sent the company’s share price 5% lower.

Looking ahead, G4S is forecast to post a rise in earnings of 12% in the current year. This suggests its overall strategy is working well, having a positive outlook. Despite this, it has a price-to-earnings growth (PEG) ratio of just 1, which suggests it may offer a wide margin of safety. As a result, it could be worth buying for the long term, appearing to offer growth at a reasonable price.

Value potential

As mentioned, Taylor Wimpey also appears to offer good value for money at the present time. The company has a price-to-earnings (P/E) ratio of just 8.2, which indicates investors are expecting a challenging period for the business. However, with its bottom line forecast to rise 4% in the current year, and the company having reported robust growth in demand for its new homes in recent quarters, it could offer a margin of safety.

Of course, the wider UK housing market may endure a more challenging period. Valuations are high, while an uncertain period for the wider economy may mean demand dries up to some degree.

In such a scenario, Taylor Wimpey could be a better buy than a buy-to-let. It offers greater diversity, less risk, and the potential to benefit from a dividend yield of around 9.7%. The Help to Buy scheme is expected to continue over the medium term, while further government policies may encourage demand to remain robust even if the wider economy experiences a period of difficulty following Brexit.

For investors who are seeking to capitalise on the long-term growth story of the UK property market, housebuilders such as Taylor Wimpey may be a better means of doing so versus a buy-to-let. Greater tax advantages when invested through an ISA, as well as a more favourable risk/reward ratio, could mean now is the right time to buy a slice of the stock for the long run.

The post Why I’d dump buy-to-let and buy into the Taylor Wimpey share price today appeared first on The Twelfth Magpie.

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

In the short run, there could be further falls ahead. But in the long run, the company could offer recovery potential. Is it therefore worth buying alongside another falling stock which released a profit warning on Wednesday?

Disappointing update

The company in question is support services business G4S (LSE: GFS). It released a trading update for the three months to 30 September, with organic revenue of 2.5% being up on the 0.2% growth recorded in the first half of the year. The company delivered strong organic growth rates in security services in North America and Asia, as well as in cash technology solutions. This growth, though, was offset to some extent by lower revenues in Benelux and in conventional cash services.

Looking ahead, the company expects to report profit for the full year which is in line with the previous year. This is somewhat disappointing, and is likely to be the key reason for the stock’s 9% decline following the update.

While G4S may be unable to deliver improving profitability in the current year, it seems to be well-placed to perform well next year. It is expected to post a 12% rise in profit in 2019, with it having a high-quality pipeline according to the update. With its shares trading on a price-to-earnings growth (PEG) ratio of around 1, they could offer growth potential over the long run.

Improving prospects

As mentioned, the Rolls-Royce share price has endured a challenging recent period. Investors seem to be uncertain about the prospects for the world economy, with the potential for further tariffs on imports in countries such as China and the US. Alongside this, the US economy is performing relatively well according to recent GDP figures. As such, a rising US interest rate could lead to a squeeze on businesses and consumers not only in the US, but also across much of the developing world.

Therefore, it is perhaps unsurprising that Rolls-Royce has experienced a share price decline. The company now trades on a PEG ratio of around 0.3, which suggests that it could offer good value for money. It may also continue to benefit from the cost reductions it is seeking to make as it aims to become a leaner and more flexible business over the medium term.

Of course, further share price declines cannot be ruled out in the near term. Investor sentiment may take time to recover. But with the business having the potential to expand its addressable market in civil aviation through new products and being expected to benefit from rising demand for defence products, it could enjoy a period of strong growth in the coming years.

The post The Rolls-Royce share price falls 20%. Here’s why I think the FTSE 100 share can’t be ignored appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Rolls-Royce. 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.

Missed expectations

Year-to-date, shares in medical products company Convatec (LSE: CTEC) have lost 21%. Investors have rushed for the exit following a series of worrying developments including a profit warning and immediate departure of its CEO a few weeks ago.

However, over the longer term, I believe this business should be able to rebuild its reputation because the demand for wound care products is only going to expand. Analysts are predicting sector growth of around 4% per annum.

These tailwinds should give Convatec room to stabilise itself in the years ahead. City analysts are expecting earnings per share (EPS) to come in at $0.16 for 2018, putting the shares on a forward PE of 12.9. In my view, this isn’t too demanding, especially for a defensive healthcare company.

Looking past Convatec’s short-term, self-inflicted issues, I think now could be a good time to snap up shares in the troubled medical group.

Growing market

I’m optimistic about the outlook for security group G4S (LSE: GFS) for similar reasons. The company’s problems are mainly self-inflicted, and the broader global security market is expected to grow at a high single-digit annual rate for the foreseeable future. 

As one of the largest private security firms in Europe, with a foothold in the United States and other regions around the world, G4S is well-placed to benefit from this growth.

Recently, shares in the firm have come under pressure after the UK government was forced to take control of Birmingham prison, which it has been running since 2011 on a 15-year contract. This is just a small part of the group’s global operation, but it seems investors are worried about the impact the development will have on the company’s reputation.

While it’s not ideal, I still think the shares are attractive, primarily because they are changing hands at a highly-discounted 10.6 times forward earnings, and support a dividend yield of 5%. After G4S sorts out its problems, I reckon the shares could re-rate to a higher multiple.

Brexit jitters

My last 52-week low pick is recruiter Hays (LSE: HAS). After adding around 15% during the first eight months of 2018, shares in Hays are now trading down 20% on the year after issuing a weak trading update at the beginning of October.

I think this could be an excellent opportunity for value-seeking investors. The sell-off has taken the shares down to a valuation of just 12.5 times forward earnings. Previously, the stock was trading at a forward P/E of nearly 20, which tells me that recent decline seems to be based on Hays’ premium valuation more than anything else. Indeed, City analysts are still expecting EPS growth of 11% for fiscal 2019. Further growth could be on the cards in the years after as well, as the global economy continues to expand. 

Added to the attractive valuation, there’s a 4.5% dividend yield on offer, backed up by £80m of net cash on the balance sheet.

The post 3 stocks trading at 52-week lows I’d buy today appeared first on The Twelfth Magpie.

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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.

The first company I want to consider is FTSE 100 outsourcing group G4S (LSE: GFS). Last week’s half-year results triggered an 11% share price slump. But I think critics are too quick to dismiss this business.

Increasingly profitable

The group’s two main businesses are cash handling services and security solutions, such as prisoner transport and facilities management. It operates in about 90 countries and has around 560,000 employees — security is generally quite a labour-intensive business.

Under chief executive Ashley Almanza, the firm is seizing on opportunities to introduce more technology to its business and reduce headcount. This is a long-term project and won’t happen overnight. But when paired up with more selective contract bidding and efficient management, it’s helping to make G4S more profitable.

Its operating margin has risen from 3.7% in 2014 to 6.4% in 2017. Although that’s still relatively low, the business generated a return on capital employed (ROCE) of 14% over the last 12 months. That’s a big improvement on the 2014 figure of 7.3%.

Only one concern

My only real concern is that net debt is high, at £1,566m. This total fell by £41m during the first half, but G4S’s ratio of net debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) was unchanged at 2.7. That’s well above my preferred maximum of two times EBITDA.

I believe more progress is needed on debt reduction. But this aside, I’d say the stock looks reasonably-priced for income buyers, on a forecast P/E of 13 and with a prospective yield of 4%.

A small-cap alternative

Housing and care services provider Mears Group (LSE: MER) reported its half-year figures this morning. Revenue at this £350m company fell by 8% to £435.3m during the period, but pre-tax profit was 1% higher, at £12.9m.

Like G4S, Mears is focused on improving its profit margins rather than growing at any cost. Today’s figures show that the group generated an adjusted operating margin of 4.7% during the half year, up from 4.1% during the same period last year.

A tale of two halves

Mears employs around 10,000 people across two divisions, Care and Housing.

The Care business provides in-home care services for more than 15,000 elderly and disabled people. Housing provides maintenance and repair services, mainly for social housing landlords.

Margins are constantly under pressure in both businesses. But what concerns me the most is a new initiative where the company borrows money to buy properties and do them up, before selling them to long-term investors who rent them out. Mears typically gets the maintenance contract for these properties.

Management says this enables the firm to win new work it might otherwise miss out on. But it seems to me that the company is taking on extra risk on behalf of its clients, without much clear reward.

Property purchases like these helped lift the group’s average daily net debt from £96.4m to £114.4m during the first half of this year. This resulted in a leverage ratio of 2.5 times EBITDA.

The shares trade on 11 times forecast earnings and offer a 3.9% yield. This could be an attractive entry point, but I’d rather put my money in G4S.

The post Have £2,000 to invest? This FTSE 100 dividend stock is worth considering appeared first on The Twelfth Magpie.

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

Time to buy? 

Since 2012, G4S has struggled. After reporting a small profit in 2012, it plunged to a £365m net loss in 2013. Profits recovered in 2014, before slumping again in 2015 by 95%. 

After reporting net income of £198m for 2016 and £236m for 2017, City analysts are expecting the group to earn £293m for 2018. According to figures released by the firm today, for the first six months of 2018, it looks like G4S is well on the way to meeting the City’s growth projection. 

Profit before interest, tax and amortisation from its continuing businesses (after stripping out parts of the business earmarked for closure or lossmaking contracts) rose 5.9% to £235m. Revenue from continuing businesses ticked up 6.2% to £3.7bn. EPS rose 8% to 8.3p from 7.7p. Management is targeting medium-term annual EPS growth of between 4% to 6%. 

I believe these numbers demonstrate that G4S is back on track. Earnings are growing, and the company’s bid pipeline is expanding. The pipeline totalled £7bn in annual contracts at the end of June. 

Nonetheless, what concerns me is the group’s razor-thin operating profit margin of just 6.4%. Management is trying to improve margins with a £100m efficiency savings target by 2020, which is badly needed. On top of this, the firm has £1.6bn of net debt. Looking at the business’s cash flow figures, last year it was able to pay off £260m of debt on top of paying a 9.7p per share dividend (a yield of 3.4%), so it is heading in the right direction. That said, at 14 times forward earnings, shares in G4S look overpriced to me after taking into account the high level of debt and tight profit margins. 

Buy the best 

I like to invest in companies with fat profit margins and cash-rich balance sheets to protect against uncertainty. Neil Woodford’s favourite homebuilder Taylor Wimpey (LSE: TW) is an excellent example.

With an operating profit margin of 20% and just under £500m of net cash on the balance sheet, Taylor is one of the market’s most profitable companies, and its cash balance gives it protection against a housing market downturn. 

The company has also earned itself a reputation as a dividend champion. For 2018, analysts have pencilled in a dividend of 15.4p per share, giving a yield of 8.8%. Next year, as the profits continue to roll in, Taylor is projected to distribute 17.7p per share, a 10.1% dividend yield. 

And on top of this market-beating payout, the shares also trade at a highly attractive forward P/E of 8.1. 

What’s not to like? Well, Taylor’s fortunes are dependent on the state of the UK housing market. Recently, cracks have been starting to show in the market, particularly in London, one of the group’s primary markets.  Still, I believe a full-blown property crash is unlikely just yet. Banks remain happy to underwrite mortgages and the government’s help to buy scheme does not end until 2021. These tailwinds should support Taylor’s growth for the foreseeable future. That’s why I believe the homebuilder is a better buy than G4S. 

The post Why I’d ignore the G4S share price and buy this Neil Woodford FTSE 100 dividend stock appeared first on The Twelfth Magpie.

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• £10,000 in these 3 FTSE 250 stocks could generate £982 of passive income over the next 12 months!
• How much would you need in a Stocks and Shares ISA to earn £33,814 a year in dividend income?

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.

Published today, the figures show that the group, which produces the Cathedral City cheese brand as well as Clover spreads, Country Life butters and Frylight oils, saw a 10% overall rise in revenue for the period. Adjusted pre-tax profits — which strip out exceptional items — increased 3% to £63m. 

The company has managed to achieve this performance despite “unprecedented cost inflation in the butters market,” thanks mainly to the exploding demand for Cathedral City.  In fact, demand for cheese is so healthy that management is now planning to spend £85m on an expansion programme of its cheese and whey production facilities.

Keeping up with demand

“As a result of growing demand for cheese, the company expects cheese production capacity constraints within its existing facility at Davidstow in Cornwall in the coming years,” today’s earnings release notes. The firm is tapping institutional investors for £70m to fund part of the expansion, issuing shares equal to 9.98% of its current share capital at a price of 495p. 

And with demand for its flagship product outstripping supply, Dairy Crest looks to me to be an excellent income investment. Indeed, rising demand for cheese should only boost the group’s bottom line, and with an operating profit margin in the low teens, the firm should have plenty of cash left to return to investors even after funding its investment programme. 

At the time of writing, the shares a support of dividend yield of 4.3%, and City analysts expect the payout to rise at around 3% per annum for the next few years, a little faster than inflation. 

However, I believe there is scope for these forecasts to be revised higher as Dairy Crest expands operations. As well as the bright dividend outlook, the stock also looks slightly undervalued. The shares trade at a forward P/E of just 14 based on current City numbers, which is a discount of nearly 20% to the broader food and tobacco industry sector.

Overall, Dairy Crest looks to me to be an undervalued, defensive income champion. On the other hand, I believe income investors should avoid struggling FTSE 100 security business G4S (LSE: GFS). 

Weak balance sheet 

After a string of high-profile disasters, G4S’s reputation is not as strong as it once was and growth has taken a hit in recent years. 

However, City analysts are expecting growth to return with a vengeance this year. Analysts have pencilled in earnings per share growth of 20% for 2018, up from just 11% year-on-year for fiscal 2017. 

Still, while growth is picking up, G4S’s balance sheet is weak and the group’s operating profit margin of 6.4% (for fiscal 2017) does not give much financial flexibility, which is concerning. After stripping out cash, net gearing (total debt compared to shareholder equity) is 180%, and that’s excluding a sizable pension deficit. 

In my opinion, the best dividend stocks are those with wide profit margins and cash-rich balance sheets to protect against any unforeseen developments. 

So, even though G4S might look attractive from an income perspective, with a dividend yield of 3.8%, the company’s weak balance sheet is enough to put me off the business.

The post Why I’d dump this FTSE 100 dividend dud for this income champion appeared first on The Twelfth Magpie.

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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.