Are these dividend growth stocks getting too expensive?

Do these double-bagging big-caps still justify a buy rating?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Defensive stocks like soft drinks group Britvic (LSE: BVIC) have been in strong demand in recent years. The FTSE 250 firm’s shares have risen by 27% so far in 2017 and by 112% over the last five years.

Today’s interim results showed that the group’s sales rose by 11.5% to £756.3m during the six months to 16 April, while adjusted operating profit rose by 6.7% to £73.6m. Shareholders were treated to a 2.9% dividend increase, lifting the interim payout to 7.2p per share.

However, the news wasn’t all good. When a company’s sales rise faster than its profits, it means that margins are falling. Britvic’s adjusted operating margin fell from 10.2% to 9.7% during the first half, due to rising costs and shifting exchange rates.

Should you invest £1,000 in Royal Mail Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Royal Mail Group made the list?

See the 6 stocks

The group also reported a net £5.8m of exceptional items for the period, causing after-tax profit to fall by 4.9% to £38.6m. These exceptional items included £11.2m of restructuring costs and acquisition costs of £2.1m.

Spending on restructuring and acquisitions will hopefully generate profit growth over the coming years. Analysts expect Britvic to return to growth next year, when earnings per share are expected to rise by 5% to 50.5p.

However, these one-time cash outlays have contributed to a sharp rise in debt levels. The group’s adjusted net debt was £572.8m on 16 April, up from £438.9m at the same point last year.

This means that the group’s adjusted net debt is now 2.4 times its earnings before interest, tax, depreciation and amortisation (EBITDA). That’s a big increase from  two times at this point last year, and is starting to look quite high to me.

Despite this, I believe Britvic remains a good quality company with the potential to deliver attractive returns. The stock currently trades on a forecast P/E of 15 and offering a prospective yield of 3.5% for the current year. In my view, this is about right, so I’d hold for now.

A testing valuation

FTSE 100 firm Intertek Group (LSE: ITRK) offers quality assurance services, such as product testing and inspection services. It’s a growing market and Intertek has become a big business over the last decade.

The company’s stock has risen by 355% over the last 10 years and by 29% so far this year. Earnings per share and the group’s dividend have both risen by an average of 13% per year since 2011.

Intertek is highly profitable and generated an operating margin of 14.4% last year, with a return on capital employed of 23.9%. As you’d expect, buying into this success story isn’t cheap.

Intertek stock trades on a 2017 forecast P/E of 23, and offers a prospective yield of only 1.6%.

Some investors would argue that Intertek’s performance justifies a buy rating at the current price. This may be true, although personally I’d find it hard to pay such a steep price for this stock. Earnings per share growth is expected to fall to 7% next year, and the yield is very low. I’d rate it as a hold at the moment, with a view to buying on any future weakness.

Should you buy Royal Mail Group shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. The Motley Fool UK has recommended 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.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Cheaper by a third, is Apple stock now a bargain?

Apple stock has fallen steeply of late. This writer would happily invest in the iPhone maker at the right price.…

Read more »

Investing Articles

Up 60%! See the stunning easyJet share price forecast for 2025

Harvey Jones is impressed to see just how high forecasters expect the easyJet share price to fly over the next…

Read more »

Investing Articles

The BP share price hits a 3-year low. Time to buy?

The BP share price has been trading at levels last seen three years ago, with a 7%+ dividend yield to…

Read more »

Investing Articles

Last week, Rolls-Royce shares were the most popular on this investor platform. But there’s a catch!

Those using the Hargreaves Lansdown website bought more Rolls-Royce shares than any other UK stock last week. But this isn’t…

Read more »

Investing Articles

Here’s how to start investing with £500 as the stock market tumbles

Christopher Ruane reckons a rocky stock market could throw up some bargains, potentially making it a good moment to start…

Read more »

Investing Articles

Down 44% this year, could the Aston Martin share price bounce back?

The Aston Martin share price is in pennies and barely a 10th of what it was five years ago. Could…

Read more »

Young female analyst working at her desk in the office
Dividend Shares

A 9.28% dividend yield? Here’s the forecast for HSBC in 2025 and beyond

Mark Hartley considers the long-term prospects of the UK's largest bank, examining the reasons behind its surging dividend yield and…

Read more »

Investing Articles

A rally could be coming for the UK stock market! Here’s how I aim to profit

Mark Hartley considers a strategy to profit from a potential UK market rally. Which stocks are best-positioned to sidestep the…

Read more »