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Have £1,000 to invest? A FTSE 250 dividend stock that I’d buy and hold for the next two decades

Rupert Hargreaves — Tue, 11 Sep 2018 12:45:30 +0000

In my opinion, companies that provide a specialist, bespoke service are some of the best investments you can make for the long term. Firms like Sanne (LSE: SNN) for example, which is a specialist global provider of corporate and fund administration services.

Administration services are tedious and time-consuming, but they are also extremely complex and companies can’t afford to get them wrong. With this being the case, I understand it is often more cost effective for businesses to outsource these functions, rather than build their own in-house teams.

Growth charging ahead

You only need to take a look at Sanne’s historical figures to see just how big this market for outsourced administration is becoming. From just £19m in sales in 2012, the company reported total sales of £113m in 2017.

The City doesn’t expect growth to slow down any time soon. Analysts have already pencilled in potential revenues of £157m for 2019. Alongside its first-half results release, published this morning, the firm confirmed today that it is currently on track to hit full-year growth forecasts. For the six months to the end of June, revenues grew 17%, although due to “an atypical first half weighting of results in 2017,” profit before tax declined 12% year-on-year on a constant currency basis.

And as well as the bespoke and specialist nature of the firm’s business, what I also like about Sanne is its relatively small size and cash generation. For the first half of 2018 for example, it booked an underlying operating profit margin of 30%.

These figures indicate to me that the company has plenty of capital to reinvest back into the business and expand into new markets. Bolt-on acquisitions in Madrid, Mauritius and Luxembourg show that this is exactly what management is doing.

As Sanne continues to build on its position in the market for administration services, I would be happy to hold the stock for the next two decades. Currently trading at a forward P/E of 21, the shares don’t come cheap, but I believe it is worth paying a premium to take part in Sanne’s growth story.

Bolt-on growth

Diploma (LSE: DPLM) is a business that I believe has similar qualities. The company produces specialised technical products for industries such as life sciences. This is not the sort of market where any old business can come and quickly grab market share, Diploma has spent decades building its reputation. And like Sanne, the firm is using its cash flow to acquire smaller businesses to help boost growth.

The latest acquisition was FS Cables, for a total cash consideration of £18m.

A combination of organic growth from its existing ops, as well as complementary growth from acquisitions, has helped turbocharge Diploma’s earnings expansion over the past five years. It doesn’t look as if experts believe this will change any time soon.

The City is expecting earnings to expand 26% in 2018, leaving the stock trading at a forward P/E multiple of 25. That’s a bit on the expensive side, but once again I believe this specialist business with enormous growth potential is worth a premium valuation. Over the past six years, earnings growth has averaged just under 10% per annum on a compound basis.

If this continues, it won’t be long before Diploma grows into its valuation.

The post Have £1,000 to invest? A FTSE 250 dividend stock that I’d buy and hold for the next two decades 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.

This Neil Woodford high-growth stock is just getting started

Rupert Hargreaves — Tue, 06 Feb 2018 11:35:13 +0000

Neil Woodford’s reputation has taken a battering recently as some of the former star fund manager’s top stock picks have turned out to be terrible investments. However, while some of Woodford’s positions haven’t worked out too well, others have smashed the market. A great example is IT infrastructure business Softcat (LSE: SCT).

Rising demand

Over the past year, shares in Softcat have returned just under 70% excluding dividends outperforming the FTSE All-Share by approximately 68%.

These returns look set to continue as today the company announced that trading for the six months to January 31 was better than management had expected with adjusted operating profits rising 19% year-on-year “reflecting consistent performance across the period and further successful execution of the strategy.”

Following this robust fiscal first-half performance, management now expects trading for the full year to exceed City expectations. Previously, analysts had been expecting the company to report net profit growth of around 10% for fiscal 2018 and earnings per share growth of 11.7%. It now looks as if these forecasts may turn out to be conservative.

If the company can maintain its current rate of growth, shareholders could be set for windfall profits in the year ahead. Analysts had previously been expecting the group to increase its dividend payout by 100% from 9p to 18p for full-year 2018, giving a dividend yield of 3.5% up from 1.7%. A better than expected trading performance implies that a better than expected dividend distribution may also follow. With just over £61m of cash on the balance sheet as well, the firm has plenty of financial firepower to increase returns to investors.

Growth just getting started

I believe that over the next few years, Softcat should continue to produce impressive returns for investors as the demand for IT services increases. The company provides organisations with IT solutions such as data centres, networking and security solutions, the need for which is only going to grow. If the business continues on its current trajectory, investors should be rewarded over the long term.

As Softcat roars ahead, outsourcing business Sanne (LSE: SNN) is struggling to retain investor attention.

Sanne provides administration and fiduciary services for corporations and the fund management sector, a specialised business where reputation counts for everything. Increasing demands by regulators, coupled with bolt-on acquisitions are helping the firm’s earnings multiply. After growing by 55% last year, City analysts have pencilled in earnings per share growth of 84.4% for 2017 followed by an increase of 17.3% for 2018.

Unfortunately, these growth projections have attracted investor attention, and the shares are quite expensive. At the time of writing shares in Sanne trade at a forward P/E of 24.7. Even when factoring-in growth, the stock looks expensive. The shares trade at a PEG ratio of 1.7 — a PEG ratio of less than one indicates that the shares offer growth at a reasonable price.

With this being the case, even though Sanne is growing a lot faster than Softcat, I believe that the latter would make a better investment. Not only is the company cheaper, but it also has a long runway for growth ahead of it. Meanwhile, demand for Sanne’s services might be improving, but this market is becoming more competitive, and the stock’s premium valuation leaves little room for manoeuvre if growth starts to stutter.

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2 growth stocks with massive potential I’d buy today

Rupert Hargreaves — Wed, 17 May 2017 09:35:10 +0000

On the Beach Group (LSE: OTB) may not sound like one of the market’s top growth stocks but over the past few years, thanks to an aggressive marketing strategy and good reputation among customers, the company’s growth has exploded.

On the Beach does exactly what its name suggests. The firm sells beach holidays mainly to customers in the UK and is just starting to expand overseas. For the first half, the company reported revenues of £38.1m, of which £37.5m came from the UK market, and £0.6m was international.

Standout business

What makes the company stand out from its existing legacy peers is its value proposition. You see, it is a disruptor within the tourism industry as the company has used technology to improve its customer offering, keep costs low and grab market share. The business is an online-only travel agent, which means that compared to other companies in the industry, overheads are low and there’s more cash available for reinvestment into marketing. For the first half of the year, 27.5m customers visited its websites, up 9.5% year-on-year. Direct costs for the business dropped to 13.6% of revenue and marketing expenses fell to 40.5% of revenue, from 46.3%.

Benefits of scale

On the Beach is seeing the benefits of scale accelerate its growth now that it is well established in the UK. After reporting a pre-tax loss of £2.5m for the year ending 30 September 2015, profits have expanded significantly and City analysts are expecting the company to report a pre-tax profit of £27.5m for the 12-month period ending September this year. Further growth is anticipated for the following financial year. Analysts have pencilled-in earnings per share growth of 25% to 21.3p as On the Beach’s bottom line continues to benefit from economies of scale. And considering the company’s projected growth rate, the shares look undervalued at current levels.

Indeed, shares in On the Beach currently trade at a forward P/E of 19.5 and a PEG ratio of 0.6. A PEG ratio of less than one signals that the shares in question offer growth at a reasonable price. As On the Beach continues to expand, this is one stock that looks set to produce huge returns for shareholders in the years ahead.

Zero to hero

Sanne Group (LSE: SNN) is another company that looks set to generate huge returns in the years to come.

Sanne’s growth over the past three years has been nothing short of staggering with pre-tax profit growing from £7.8m to the £39.9m projected for this year. At the same time, earnings per share increased from 6.3p to 23.6p. Analysts are expecting this growth to continue. After rising 34% for 2017, City analysts have pencilled-in earnings per share growth of 16% for 2018.

Even though the shares may look pricey at 27.2 times forward earnings, a PEG ratio of 0.8 signals that despite the lofty valuation, shares in Sanne offer growth at a reasonable price.

The post 2 growth stocks with massive potential I’d buy today appeared first on The Twelfth Magpie.

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Rupert Hargreaves 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.