A travel boom

First up is Saga (LSE:SAGA). The company has already been bucking the broader trend of uncertainty since March, when the market was falling. It’s now up 50% in the past three months and a whopping 362% in the past year.

The numbers over the past year look impressive, but they were based on a very low starting share price. The over-50s specialist has been through a tough period, but recent results suggest a turnaround is gaining traction. The company has swung back to profit for the first time in years, driven by strong demand for its travel division, particularly cruises.

That’s why I think it could do well in this market recovery. Travel is one of the most sentiment-sensitive sectors out there. When geopolitical tensions rise, people cancel trips. When things calm down, bookings rebound, often very quickly. Add in Saga’s restructuring efforts, including streamlining operations and reducing debt, and the case for it to outperform the FTSE 250 into the summer starts to look very compelling.

In terms of risks, debt is still high. The full-year results released earlier this month showed the leverage ratio falling, but still at 3.7x. Further, if global tensions pick up again, it could quickly reverse any travel momentum for the growth stock.

Time for a refresh

The second stock is Morgan Sindall (LSE:MGNS). The stock is up 44% in the past year. Given that this is a construction and regeneration group, some might be surprised by my pick.

When geopolitical risks fall, businesses tend to loosen the purse strings. That’s good news for construction firms tied to commercial investment cycles. If confidence keeps improving, Morgan Sindall could see a material boost to its order book and earnings forecasts.

An update last week said full-year pre-tax profits should be “significantly ahead” of previous guidance. Part of the reason behind this is a boom in office refurbishments, as businesses upgrade workspace quality in a post-pandemic world. What I like here is the combination of strong existing demand, which can be added to as companies in sectors impacted by the Middle East conflict feel more comfortable spending.

One concern is that the construction industry typically operates on very slim margins. The company’s construction division targets an operating margin of just 3.5%, so even minor cost overruns on large projects can quickly erode profitability.

Overall, I think both stocks could do well if the sentiment around the market recovery extends in the coming months. Therefore, investors who agree with my view could consider them.

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Always needed

3i Infrastructure (LSE: 3IN) owns stakes in European and North American businesses that operate and manage assets in areas such as energy and utilities, transportation and communications. The fact, demand for things such as water and waste management and telecom towers is about as steady as it gets, meaning the £3.2bn-cap can provide investors with a stable income stream.

Right now, the shares yield a forecast 3.8%. That’s more than an investor would get from simply buying a fund that tracks the UK’s mid-cap index.

Of course, operating in a defensive part of the market doesn’t mean those dividends are ever guaranteed. Arguably the biggest risks here are things that management has absolutely no control over, such as inflation, interest rates and commodity prices.

Capital gains have also been modest over the years. So those looking for a nice dollop of growth to accompany that income might wish to consider other stocks as part of a diversified portfolio.

Meaty dividends

Meat supplier Cranswick (LSE: CWK) might be worth looking at. It’s another firm that’s consistently hiked dividends year after year. But the business has also delivered stellar share price growth over a very long period. And that’s Fool UK’s preferred time horizon when it comes to judging the merits of an investment.

There have been wobbles along the way, to be sure. Between August 2021 and October 2022, the stock fell roughly 35% in value as higher costs squeezed margins. That sort of drop’s worth bearing in mind given the shares currently change hands at a not-exactly-cheap price-to-earnings (P/E) ratio of 19 and inflation’s climbing again.

One other thing to note here is that the dividend yield of 2% is on the low side. However, that income will still compound over time. And personally, I much prefer a company to be disciplined with its capital over one that is offering high-but-stagnant distributions, possibly due to poor trading. The latter tends to be cut eventually.

Strong growth

A final dividend growth stock that might be one to investigate further is Morgan Sindall (LSE: MGNS). Investors in the housing and construction services provider will have enjoyed substantial hikes in recent years (ignoring the pandemic-related anomaly that was 2020).

The forecast yield for FY25 stands at 3.3% — on par with the average in the FTSE 250. But note that this will fall in the event of the share price rising. Out of interest, the stock’s up 11% in 2025 — double that of the index.

The long-term rise in value has been even better. Those investing five years ago will now be looking at a capital gain of around 240%! That’s brilliant considering that Morgan Sindall’s also exposed to the macroeconomic uncertainties mentioned earlier.

Naturally, any delays or issues with contracts could cause a shift in sentiment. But the shares still don’t look excessively priced relative to the wider market (P/E of 14).

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That’s what happened this week with construction and regeneration group Morgan Sindall (LSE: MGNS). Shares in the £1.82bn company managed to climb 77% this year before I noticed!

But a sudden 22% jump last week gave it away and I had to see what all the fuss was about.

Jack of all trades

Morgan Sindall operates through six main divisions across the UK: construction, infrastructure, fit-out, property services, partnership housing, and urban regeneration services.

It does everything from large-scale civil engineering projects to commercial and retail maintenance and small urban transformations. This type of business is likely to be in high demand, which is a key factor I look for when considering an investment opportunity.

Why the sudden growth?

Last week’s price growth was big but the current trajectory started two years ago. After falling below £14 in late October 2022, the price began a recovery that’s barely faltered since, climbing 175%. 

It’s hard to say what initiated the growth back then but last week’s reasons are clear. On Tuesday 22 October, it announced that full-year profits would now be “significantly ahead” of previous expectations. This was attributed to “exceptional volumes” in its fit-out division.

This adds to the already strong H1 results posted in August. Group revenue increased 14% to £2.2bn and operating profit before tax was up 17% to £70.1m. 

That fit-out division performed particularly well, with revenue up 26% to £630m and operating profit up 36% to £41.3m. 

Construction saw a 10% growth in revenue while infrastructure revenue rose 24%. Despite challenges such as inflation, both segments achieved strong operating margins within target ranges​. 

However, the Property Services division encountered difficulties, reporting an operating loss of £11m, due to cost inflation and restructuring efforts. This is a key risk for the firm as costly borrowing reduces the overall demand for commercial and residential construction.

The industry’s also highly competitive, with several large players vying for major contracts. Intense competition can lead to thinner profit margins as companies underbid to win projects, which could threaten Morgan Sindall’s profits.

Valuation

Despite the recent growth spurt, the forward price-to-earnings (P/E) ratio’s only 14.3, which I expected to be higher. The dividend yield currently sits at 3%, slightly below average for the FTSE 250. Still, it adds some value to the stock. 

While the price could still climb a little further, the rapid growth’s likely to slow from here. Its long-term prospects still look good but I think I missed out on the biggest gains.

So how can I avoid missing an opportunity like this in the future? Strong results are one thing but they don’t guarantee future growth. It’s also important to look for shares in growing industries with high demand. Second, the company’s order book and project pipeline give an idea of upcoming revenue. 

If it’s been increasing its dividends, that’s another good sign. By examining sector demand, financial indicators and macro trends, investors can improve their chances of anticipating a stock’s upward movement before it happens.

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It’s the best-performing stock on the index end over that period, its shares spiking 29.54%. This isn’t a one-off either. The Morgan Sindall share price has more than doubled over the last year, rising 105.11%. 

The shares are smashing it today

Over five years, it’s up a blockbuster 197.12%. To put that into perspective, the FTSE 250 climbed just 3.56% during what was a volatile period for stock markets, thanks to Covid and the cost-of-living crisis.

That’s just one reason why I prefer to buy individual shares rather than index trackers. When they fly, they can really fly. Of course the opposite can happen too.

Morgan Sindall’s latest share price explosion followed an update on 22 October stating that full-year profits would be “significantly ahead” of expectations. It pinned this on “exceptional volumes” in its fit-out arm Overbury, which provides office refurbishment and as well as interior design and build services. Its order book jumped 15% to £1.3bn.

The group’s construction and infrastructure units were on target to meet full-year 2024 revenue and margin goals, and its partnership housing arm beat expectations too.

Its mixed-use partnership division remained “subdued” but with total secured orders of £8.9bn on 30 September, markets didn’t care. Especially since this followed record first-half results, published on 8 August, with revenues up 14% to £2.2bn and adjusted profit before tax up 17% to £70.1m.

Net cash jumped from £263m to £351m year-on-year, and the board capped all that by hiking the dividend by 15% to 41.5p per share.

It’s a stunning growth stock

Morgan Sindall doesn’t just offer growth in spades, it has consistently increased dividends, too (pandemic year excepted). Its trailing 2.99% yield is impressive, given how fast the share price has grown. Let’s see what the charts say.

Chart by TradingView

I have a confession to make. I’d never heard of Morgan Sindall until this morning. It only came to my attention because of its stellar performance. If I was a better, wiser investor, I’d have spotted its potential years ago, and be feeling smug and rich today. Alas…

As ever with momentum stocks, I’m worried I’m arriving at the party too late. So can Morgan Sindall continue to fly?

It still looks good value with a modest price-to-earnings ratio of 15.5%. The five analysts offering one-year share price forecasts have set a median target of 3,540p per share. That’s actually a 7.18% drop from today. However, I imagine those were produced before the recent bumper results, when the share price was lower. So I suspect they’re behind the curve.

Buying a stock after it’s jumped 30% in a month is asking for trouble. I’m likely to get hit by a bout of profit taking.

Also, investors are looking forward to falling interest rates and Labour’s plans to revive housebuilding and construction. But if rates remain high or Labour undershoots its construction targets, the sector could slip. Investor expectations are sky-high for this stock, and any underperformance will be punished.

I still believe Morgan Sindall’s future looks bright. If the economy does recover, it could look even brighter. I’ll buy when the profit-takers sell.

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Super stock!

Shares in construction and regeneration company Morgan Sindall (LSE: MGNS) have rocketed 32% in October. Go back 12 months and they’ve doubled in value. Perhaps unsurprisingly, they now sit at a 52-week high.

What on earth’s happened to generate such great gains?

Well, a quick bit of research tells me that this company has dished out nothing but positive news lately.

Back in February, the £1.9bn cap announced that 2023 had been a record year with revenue rising 14% to £4.1bn and adjusted pre-tax profit up 6% to £144.6m. At the time, CEO John Morgan said that the prospect of lower interest rates and falling inflation made him confident on the firm’s outlook. In hindsight, his optimism was justified.

This bullishness was further backed up when interim results arrived in August. Noting that “challenging market conditions” had been easing, the company predicted full-year numbers would now be “slightly ahead” of where it thought they would be.

Which brings us to October and yet another lovely update.

Profits soar

This week, the company stated that it now expected figures for 2024 to come in “significantly ahead” its own previous expectations.

A lot of this was attributed to “material profit growth” from its Fit Out division. This is the largest part of Morgan Sindall and provides office refurbishment as well as interior design and build services. By the end of September, the order book hit £1.3bn. That’s 15% up on where it stood at the end of 2023.

Several of the company’s other divisions also appear to be performing well. Profits at Partnership Housing are now likely to come in “slightly ahead” of previous guidance. Elsewhere, both Construction and Infrastructure look like hitting their targets for revenue. That said, trading in Mixed Use Partnerships — which focuses on transforming urban landscapes — continued to be “subdued“.

Should I buy the stock?

It’s hard not to be tempted to get involved in the hope that such incredible momentum will continue.

A price-to-earnings (P/E) ratio of 15 is fairly expensive relative to the Industrials sector but it’s not at eye-watering levels just yet.

Morgan Sindall has also been good to income hunters over the years and currently offers a dividend yield of 3.2%. That’s far from the highest in the FTSE 250 but it’s almost identical to what I’d get from owning an index tracker.

On the other hand, there are still some risks. While inflation dipped to a lower-than-expected 1.7% in September, there’s always the possibility it could bounce back up. This may lead the Bank of England to press the pause button on cutting interest rates.

The fact that I already have exposure to property via my investment in housebuilder Persimmon also makes me a bit wary to get involved. Margins are also much higher over there.

I’m going to sit on the sidelines for now and reassess once that potentially-very-nasty Budget on 30 October has passed.

The post Rocketing over 30% in October, what’s going on with this FTSE 250 stock? appeared first on The Twelfth Magpie.

Bucking the property lull

I’m talking about Morgan Sindall (LSE:MGNS). The group is involved in various parts of the property sector, ranging from construction and infrastructure through to post-completion property services.

Over the past year, the stock is up an impressive 29%. In contrast to some other more generic homebuilders, Morgan Sindall has performed better over the past couple of years despite the negative sentiment around the sector.

In my view, this is due to the breadth of operations that the group has. It isn’t just reliant on property prices to make money, or end users being able to get mortgages.

For example, instead of dealing with consumers, it deals directly with businesses via urban regeneration projects. It also receives money from the Government with regards to infrastructure initiatives. As a result, higher interest rates and the resulting impact on buyers haven’t been a complete disaster for the firm.

Looking over recent results

Despite the broader property market lull, the 2023 results showed that revenue grew by 14% year on year. It also detailed a secured order book of £8.9bn for the future, spread across different projects. This gives me confidence that the business can build on next year.

One risk is the thin operating profit margin. At 3.4%, it’s hardly a large buffer in case costs move higher this year. Such a small margin leave it open to quickly flipping from an operating profit to a loss.

Income generation

My focus here is the dividend payments. The business currently has a dividend yield of 5%. The total payments over the past year have added up to 114p, an increase from the previous 101p.

I’d have to buy 100 shares to be paid £114 in annual income the following year. Using the current share price, this would cost me £2,240.

Let’s assume that the dividend per share stays the same, as does the share price. What I could do is invest £224 a month to purchase 10 shares. If I kept this up for seven years, I’d have a pot that should then pay me out £1,139 in the following year.

At that stage, I’d own 850 shares of the business. Some might find that investing this amount each month in one stock too much. This depends on how much in total an investor can afford to set aside. However, I do get that the build-up of the investment here might take longer if someone only wanted to invest, say, £100 a month.

Ultimately, I think the dividend share is a good choice that I can use to help enhance my portfolio going forward. On that basis, I’m thinking about adding it to my pot shortly.

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I’m looking at three today, all of which I think look good value for income investors like me. And we’ll have interim updates from all of them during the month. Will good news help turn around their share price weakness?

Construction

First is Morgan Sindall (LSE: MGNS), with first half results due on 4 August. Morgan Sindall is one of the UK’s biggest construction groups, active in everything from affordable housing to infrastructure projects.

The shares put in a bit of a recovery in 2021, but they’ve gone off the boil a bit so far this year. And I think that leaves the stock on an attractive forward valuation. We’re looking at a forecast price-to-earnings (P/E) ratio of only a bit over nine, and dropping.

The forecast dividend yield is around 5% and rising. That’s not one of the biggest yields around, but it has one key characteristic that I like. The 2021 dividend was covered almost two and a half times by earnings.

That boosts my confidence that dividends, heavily cut for the pandemic year of 2019, could be in for a sustainable progressive run now.

Investment

The whole asset and investment management business has tanked of late, suffering cash outflow as investors shift their money elsewhere. To my mind, that’s left Abrdn (LSE: ABDN) looking cheap, after a share price fall of close to 50% over the past 12 months.

The drop has pushed the forecast Abrdn dividend yield up to a whopping 9%. There must be fears that such a high level might not be sustainable, especially with our current economic outlook.

But on 6 July, the company announced a new £300m share buyback to return surplus capital to shareholders. The first phase, of up to £150m, has already commenced. Yes, there are risks. But I see this as a vote of confidence in the company’s ability to deliver long-term income.

First-half results are due on 8 August.

Insurance

Moving to 22 August, we should know how the first half went for Phoenix Group Holdings (LSE: PHNX).

As an insurer, Phoenix is a little difference to most. It acquires legacy life insurance and pension assets that are closed to new business, and makes its money from managing them. It currently owns brands that include Standard Life and SunLife.

Phoenix has been generating strong cash from this business, and delivering progressive dividends. And after a weak year for the share price, forecasts now suggest a yield in excess of 8% this year, rising further after that.

Risks

All of these come with the risk that they’re in sectors likely to suffer more during an economic downturn than most. And I think share price weakness could continue in the second half of 2022.

And if August’s updates show any sign of dividend weakness, we could see dips. But, right now, I like the look of these as long-term income investments.

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Here’s how I’d aim for a total of £30,000 a year in later life.

Maximising the State Pension

I’ll assume that I’ll get the maximum State Pension amount (I’ll need 10 years to be entitled to a pension and 35 qualifying years to bag the full amount).

I anticipate I’ll work for a sufficient period to meet the starting threshold. However, if my stock market gains are better than expected, early retirement is a possibility.

In that case, I’d pay voluntary contributions to maximise my State Pension payments.

So, as simply as that, I’ve secured my first £9,627.80 in annual passive income for retirement, barring drastic changes in government policy.

Investing in dividend stocks

I now need the remaining £20,400 to come from a diversified portfolio of dividend stocks. Let’s explore two on my watchlist.

M&G (LSE: MNG) is a global investment manager with exposure to a range of assets from equities to real estate. The M&G share price is down 16% over 52 weeks, but I’m drawn to the whopping 9.4% dividend yield, which exceeds the FTSE 100 average of 3.9%.

This business has a strong presence in the UK and Europe. It’s been listed on the London Stock Exchange since a demerger from Prudential. As its operations are in developed markets, growth prospects may not be too exciting. In addition, the high price-to-earnings ratio above 60 is a risk. This reduces the stock’s value investment appeal.

Nonetheless, M&G delivered total capital generation of £2.8bn over two years — well ahead of the original target. Furthermore, a £500m share buy-back programme is a big positive. Overall, I see potential for healthy shareholder returns in the future. So, I’d add to my existing holding for my passive income portfolio.

Next, Morgan Sindall Group (LSE: MGNS) is a FTSE 250 construction stock. With a 5% dividend yield, it’s a solid passive income pick. The latest annual results are encouraging. Group revenue rose 6% to £3.2bn and adjusted operating profit increased 92% to £131.3m.

However, there are macroeconomic headwinds. The S&P Global/CIPS UK construction purchasing managers’ index scored 56.4 in May — a four-month low. This indicator measures construction activity in the British economy. The Morgan Sindall share price could struggle in an increasingly tough climate.

Yet the company has an impressive list of active projects from schools to residential developments. The long-term outlook remains positive for me. I’d buy.

A long-term passive income goal

It’s important for me to remember that dividends aren’t guaranteed. Although I’ve selected high-yielding stocks to buy, I think it’s safer to expect a 4% annual yield from my portfolio.

That leaves a total dividend portfolio target of £510,000, which I’d aim to reach by investing £1,000 per month. Assuming a 4% growth rate, I’d take 25 years. Of course, this calculation would change should my investments underperform.

Ultimately, the dividends should amount to £1,700 per month, allowing me to leave my capital untouched in retirement.

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Boring but beautiful?

Somero Enterprises (LSE:SOM) is a share I already hold. It’s certainly not an exciting new tech start-up. It doesn’t have lofty ambitions to disrupt industries and change the world. The company specialises in a very niche business producing concrete levelling equipment for the construction industry. While this may not get anyone’s heart racing, Buffett would acknowledge that the company sticks at what it knows and avoids the volatility of more stimulating sectors.

In its recent annual report, it revealed a 51% increase in revenues alongside an 85% increase in net income. The company has streamlined business operations and increased net income at a greater rate than revenue, which is good news. However, 2020’s poor year most likely influenced some of this data.

Somero also had record cash at the end of 2021 and no long-term debt. This gives it liquidity and mobility to seize new investment opportunities and continue to grow over the next few years. I feel the company’s recent share buyback campaign would also be of interest to Warren Buffett who has applauded the use of share buybacks in the past.

While the business is subject to inflation-linked and future growth uncertainty, I still believe it has many of the attributes that Buffett looks for in an investment. Its 7.2% dividend yield makes me even more confident about this cheap UK listed share.

A construction company with strong foundations

Morgan Sindall (LSE:MGNS) is a leading construction and regeneration company. It operates within the national infrastructure, housing and urban regeneration sectors. And it has the strong financial fundamentals that Buffett looks for with cash of £460m comfortably exceeding debt of £110m.

Once again, Morgan Sindall is unlikely to deliver stunning returns year after year and shake up the construction industry. But it isn’t promising to. What the stock does offer is a fair return on equity of 20%, a strong balance sheet and a competent management team that has investors’ needs as a priority.

The stock is currently trading at a price-to-earnings (P/E) ratio of 11.3 and offers a 4% dividend yield, which suggests relatively good value. The business has also seen strong growth in the regeneration and housing sectors. This is expected to grow as the UK government pushes to build more houses and tackle the undersupply of housing.

Morgan Sindall does have exposure to inflationary risks. There’s an expected increase in the price of materials and lower future construction demand to deal with. However, it has adequate cash to deal with future risks.

Nobody can truly predict what Warren Buffett would invest in. However, these two stocks hold many of the same attributes as his previous successful investments. I’m considering adding to my Somero holding and opening a new position in Morgan Sindall to try and emulate Buffett’s incredible performance.

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So, these are the UK shares I’d buy and hold for at least a decade to create and grow a passive income stream.

Two top UK shares

To choose what I think are the best two companies, I’ve looked for those with high dividend cover, a history of dividend and earnings growth and yields above 3%.

Meeting these criteria were UK shares such as MTi Wireless, Belvoir, Hargreaves Services, Domino’s Pizza, and Intermediate Capital, as well as a number of investment trusts.

But two other shares particularly caught my eye – Rio Tinto (LSE: RIO) and Morgan Sindall (LSE: MGNS). The former has an earnings per share (EPS) compound annual growth rate (CAGR) of 44.7% over the last three years. This is very high, and has helped underpin dividend growth. The dividend yield is already very high at around 10%, but it’s covered by earnings. Earnings cover the dividend by more than 1.5 times. Along with a reasonable price-to-earnings ratio (P/E) of six, Rio Tinto looks like a top buy-and-hold passive income share for me.

But mining is an industry with boom and busts and there’s a risk we’re at the top of a cycle right now. Yet with electric cars needing copper and other metals in increasing amounts, there’s going to be demand for Rio’s output for a long time to come.

The company digs for copper, aluminium, silver, gold, bauxite and diamonds, but it’s best known for iron ore. That makes it reliant on steel production and Chinese construction for further growth. This could be a risk, especially in light of the recent debt problems at Chinese developer Evergrande. 

The stock isn’t without risks and has environmental challenges to face up to. Nonetheless, looking from the point of view of creating passive income, it looks like a top share for me to buy right now and then hold for a decade. I’m very tempted to buy the shares.

Investing for passive income

Shares in construction and infrastructure group, Morgan Sindall, yield around 4% and are on a P/E of 10, indicating they could be quite good value. The three-year EPS CAGR is much less than Rio’s, but is still respectable at 12.3%. Also, the dividend – which has been growing well – is covered more than twice by earnings. All in all, it looks like a very promising passive income investment.

The group is doing well operationally and financially, which bodes well for the future. It recently reported record full-year results with double-digit profit growth being driven by a modest increase in revenues and improved operating margins. It had net cash of £358m as of 31 December 2021, which suggests a balance sheet in good shape. Again, I’m tempted to buy.

Rio Tinto and Morgan Sindall are my top picks to buy and hold for a decade to create a passive income from UK shares.

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