2 inflation-busting dividend growth stocks I might buy for my ISA

Roland Head revisits a stock he sold too soon and explains why he wouldn’t sell now.

| 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.

Selling growth stocks too soon can be a costly mistake. Successful companies can often look expensive for long periods as they grow. It’s in these times that investors can sometimes enjoy the biggest gains.

Today I’m looking at two highly-rated engineering stocks whose recent performance suggests they could continue to climb. Stocks like these can be ideal choices for your ISA as future capital gains and dividends will be tax-free.

Steaming gains

Shares of FTSE 250 group Spirax-Sarco Engineering (LSE: SPX) rose by 3% this morning after the company said that its adjusted pre-tax profit rose by 29% to £229.1m in 2017.

This 130-year old firm produces industrial steam systems and a variety of other specialist products. Sales rose by 32% to £998.7m last year, thanks to a mix of organic growth, acquisitions and favourable exchange rate movements. Shareholders will receive a total dividend of 87.5p, an inflation-beating 15% increase on 2016.

Why I’d buy

Today’s figures show that the firm’s underlying trading margin rose by 0.9% to 24.7% last year, while its adjusted return on capital employed rose from 47.9% to 52.9%. These high figures drive the group’s strong cash generation. They mean that it’s able to expand continuously without needing much debt.

Such high profit margins also suggest to me that the firm’s products have a competitive advantage, perhaps because their specialist nature means that competition is limited.

The shares do look expensive, with a 2018 forecast P/E of 25 and a dividend yield of just 1.6%. But analysts expect earnings to rise by 11% this year. I believe it would be premature to call the top on this stock just yet.

I sold too soon

I invested in reinforced polymer engineering group Fenner (LSE: FENR) just before the mining slump hit rock bottom. This company produces heavy duty conveyor belts for mines and a variety of polymer products for the oil, gas and medical sectors.

My shares performed well during the first part of the mining sector recovery, but I sold for a modest profit much too soon. Had I held on, I’d now be sitting on a 120% profit at current prices.

My mistake was selling when the shares started to look expensive. I focused too much on past performance, not on the potential success of the group’s turnaround strategy. This has been impressive.

Strong momentum

The group’s operating margin reached 8.1% last year, but it’s been above 10% in the past. I suspect this year will see another increase.

January’s trading update revealed that results for the year to 31 August are expected to be ahead of forecasts. Analysts now expect the firm to report adjusted earnings of 22.2p per share this year, a 25% increase from last year. Fenner’s dividend is expected to rise by 20% to 5p.

The group’s earnings should rise by a further 20% in 2018/19, giving the stock a price/earnings growth ratio of 1.2. That still looks affordable to me, despite the P/E ratio of 21.

Fenner would be my pick of the two shares I’ve looked at today. I’d continue to hold and would consider buying more.

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 of the shares 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.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »