Why this Neil Woodford dividend-growth stock could have further to go

Roland Head considers two stocks from the same sector which have performed strongly over the last year.

| 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.

The two companies I’m looking at today have risen by an average of 36% over the last year. One has attracted the backing of star fund manager Neil Woodford.

Today I’ll explain why I remain bullish on these stocks, even after several years of growth.

Operating at capacity

The UK brick manufacturing industry is “operating at capacity” with “limited options for expansion”. That’s the view of Martin Warner, chairman of Michelmersh Brick Holdings (LSE: MBH).

Should you invest £1,000 in Alliance Witan 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 Alliance Witan made the list?

See the 6 stocks

Shares of this £64m firm edged higher today after the group said revenue rose by 26% to £37.9m last year. Underlying operating profit climbed 42% to £6.5m during the period. This implies an operating margin of 17.5%, highlighting the strong pricing power enjoyed by brick manufacturers at the moment.

Last year’s growth was helped by the £31.2m acquisition of brick-maker Carlton, which the company says has “significantly strengthened” the group’s market position. One downside to this is that this large deal left Michelmersh with net debt of £17.5m at the end of 2017, versus net cash of £4.7m one year earlier.

I estimate that it could take two years to reduce these borrowings to a more comfortable level. If the market slows during this time, shareholders could face elevated risks.

This could still be a buy

The outlook for 2018 seems safe enough at the moment. Mr Warner says that “2018 promises to be busy” and that the group’s order book, at 60m units, is “strong”.

Consensus forecasts suggest that earnings per share could rise by 40% to 8.2p this year, as the Carlton acquisition contributes a full year of profits. The dividend is expected to climb 44%, to 3.1p per share.

These numbers put the stock on a forecast P/E of 10, with a prospective yield of 3.7%. The shares remain attractive in my view, although I’d prefer a stock with less debt at this stage in the market cycle.

This Woodford pick has soared

One possible choice is brick and block maker Forterra (LSE: FORT). Shares in this firm have risen by 71% since its flotation in April 2016. It’s been a strong performer for fund manager Neil Woodford, but are the shares still worth buying?

Forterra around nine times larger than Michelmersh, measured by market cap and sales.

The group’s larger size means that acquisition opportunities are limited, but I’m not bothered by this. At this point in the market cycle, I’m happy to see management focusing on profitability and cash generation.

A cash machine

Last week’s 2017 results suggested that’s exactly what’s happening. The group’s underlying operating margin was largely unchanged at about 20% in 2017, but operating cash flow rose by 29% to £90m. This equates to 140% of operating profit, compared to 118% in 2016.

As a result, net debt fell by £31.5m to £60.8m, despite the firm spending £20m on the acquisition of Bison Manufacturing. Forterra now trades on a price/free cash flow ratio of 9, which is unusually low.

Analysts expect both earnings per share and the dividend to rise by about 9% this year. These forecasts put the stock on a 2018 P/E of 11.5, with a prospective yield of 3.5%.

I’d rate Forterra as a buy at these levels and would probably choose it over Michelmersh, thanks to the larger firm’s lower debt levels.

Should you buy Alliance Witan now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation 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 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

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »