Fat profit margins 

Playtech is an interesting enterprise. The company supplies technology for the gambling industry, which as it turns out, is a very lucrative business. 

Over the past five years, it has reported an average operating profit margin of 43% and return on capital employed — a measure of profit for every £1 invested in the business — of approximately 15%, nearly three times higher than the current market average. And because the development of software does not generally require a large amount of capital spending, its fat profit margins give it plenty of cash to return to investors. 

According to my calculations, over the past five years, the company has distributed £666m to investors via dividends, approximately 44% of its current market capitalisation.

Dividend champion 

I see no reason why this trend cannot continue for the foreseeable future. City analysts believe Playtech has the potential to produce earnings per share of 52p for 2018, and distribute 31.4p of this to investors, giving a potential dividend yield 6.8%. The payout is expected to grow modestly to next year to 35p thanks to a 14% uptick in earnings. If the company hits this target, investors are in line for a potential dividend yield of 7.4%.

Not only do the shares support a market-beating dividend yield, the stock is also trading at a relatively undemanding forward P/E of 8, compared to the IT services sector average of 19. Put simply, if you are looking for an undervalued business with a market-beating dividend yield to add to your ISA, I reckon Playtech could be the perfect pick.

On the other hand, Sportech (LSE: SPO), Playtech’s smaller peer, does not appear to offer the same level of value.

The last time I covered this market minnow, I speculated that recent developments in the US sports betting market could give the company “tremendous scope to grow over the next decade.“

Missed opportunity 

Unfortunately, it seems that management is struggling to capitalise on the opportunities available in the US. A trading update from the company today informed investors that, “certain expected sales contracts are unlikely to be secured in 2018,” so adjusted earnings before interest tax depreciation and amortisation (EBITDA) for the year are likely to come in as much as 10% below current market expectations.

Even though this lower target will still represent year-on-year adjusted EBITDA growth of as much as 20%, it is a disappointment for shareholders who had been expecting much more from the company.

Before today’s announcement, shares in Sportech were changing hands for more than 20 times forward earnings, reflecting investor optimism in the business. Now that the outlook has deteriorated, I’m not convinced that it is worth paying a premium for the stock. Playtech, with its already established business and attractive dividend schedule, is a much better buy in my opinion.

The post Have £2,000 to invest? I’d take a look at this 7% yielding FTSE 250 bargain for your ISA 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.

However, I believe I’ve stumbled across two companies that both offer this unique mix. Below, I’m going to weigh up the pros and cons of investing in these hidden growth and income champions.

Out of favour

At the beginning of July, shares in gambling software developer Playtech (LSE: PTEC) crashed by nearly a third after it issued its second profit warning in two years. 

Management pointed to an “increasingly competitive backdrop” in Asia, which is expected to have a “significant impact on revenue throughout the rest of the year.“

Following the dour trading update, the City has been quick to downgrade its forecasts for the company’s growth in 2018. Before the warning, analysts had been forecasting EPS of €0.76 for the full year. Now a lower €0.67 is being targeted.

Looking at these numbers, I believe the market has overreacted to Playtech’s woes. After sliding 33% in the days after its profit warning, shares in the company now trade at a multiple of just 8.3 times forward earnings. 

The valuation is even more compelling after discounting cash. According to its most recent numbers, Playtech has €107m of net cash, and that’s excluding €222m the firm made from selling its stake in online gambling group GVC in June. 

Combined, I estimate these two cash balances are worth 83p per share. Using this figure, my calculations suggest shares in Playtech are currently trading at a cash-adjusted forward P/E of 7.2. On top of this highly attractive valuation, the shares also support a dividend yield of 6.8%. With more than €300m of cash to play with, it does not look as if this distribution will come under threat any time soon.

Beating expectations 

So, after considering all of the above, I believe Playtech could be a fantastic income and growth investment. 

Right now, it looks as if the market has written off the business. If Playtech can prove the market wrong, and sales start to recover, I believe the stock could easily outperform the broader market.

Playtech’s smaller peer Sportech (LSE: SPO) is another growth play I believe you should consider for your portfolio.

What excites me about Sportech is its future potential. The tech business has struggled to grow over the past few years, but the recent opening up of the US as what could be one of the world’s largest sports betting markets gives the company tremendous scope to grow over the next decade. 

Soon after the US Supreme Court decision that effectively allowed sports betting across the country in May, Sportech signed an agreement with Sportradar (a $2.4bn company) for sports betting data, trading and risk management services.

It has only been a few months since the Supreme Court ruling, and City analysts have not yet come out with updated growth forecasts for Sportech. And until we have solid numbers on the size and growth of the market, it’s unlikely reliable predictions will be published. 

Still, estimates suggest $150bn is already spent every year betting on sports across the country. Even if Sportech can grab just a tiny section of this market, the company and its shareholders should be well rewarded. This is why it’s worth keeping an eye on it in my opinion.

The post This FTSE 250 dividend stock could produce explosive gains for your portfolio 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?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended GVC Holdings. 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.