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.

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 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

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »