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One dividend stock I’d buy and one I’d sell

These two shares could have very different futures.

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Peter Stephens
Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.
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With dividend shares becoming more popular as inflation rises, it is unsurprising that some income stocks now trade on high valuations. Clearly, this is to be expected while the FTSE 100 is near an all-time high. But it also means there may be less upside potential on offer for a number of stocks at the present time. With that in mind, here are two strong dividend stocks, one of which seems overvalued and the other is seemingly undervalued.

Strong performance

Reporting on Thursday was property investment and development company, Helical (LSE: HLCL). It announced strong performance for the period since 1 April, with the company on target to meet its milestones.

For example, it has received planning permission at Power Road Studios in London for a new 30,000 sq ft office building, as well as a 12,500 sq ft new floor on an existing building. It has also sold 11 additional residential units at Barts Square in London. As well as further sales elsewhere in the UK and an acquisition in Manchester, this suggests the company is making encouraging progress with its strategy.

Of course, the UK property industry is experiencing an uncertain period. Brexit challenges remain and they have caused confidence among investors and businesses to come under pressure. This could hurt Helical’s medium-term outlook, with its bottom line forecast to rise by just 2% next year.

Despite this, the company trades on a price-to-earnings (P/E) ratio of 34, which suggests that it lacks value at the present time. A narrow margin of safety may not be appealing at a time when the wider sector could experience a downgrade to earnings outlooks. As such, and despite a dividend yield of 3%, it seems to be a stock to avoid.

Income potential

Also operating within the property sector is construction company Galliford Try (LSE: GFRD). The company also faces an uncertain outlook, with interest rates having the potential to rise and confidence in the housing market declining.

Despite this, mortgage availability remains high and there is a fundamental lack of supply of housing. This could provide the company with a tailwind and help it to generate higher profits. This could fuel dividend growth, although at the present time the stock is among the highest-yielding shares in the FTSE 350. It currently yields 7.4% from a dividend which is covered 1.2 times by profit. This suggests there is scope for further growth in shareholder payouts – especially since earnings are forecast to rise by 51% next year.

This high rate of growth puts the stock on a forward P/E ratio of just 7.6. Even in a sector which is undervalued at the moment, this seems to be difficult to justify given the company’s positive outlook. As such, and while housebuilders may experience some challenges in the short run from Brexit, Galliford Try appears to offer a compelling investment opportunity for the long run.

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Peter Stephens owns shares of Galliford Try. 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.