2 overlooked recovery stocks offering growing dividends

It’s a good sign of a strong recovery when a company is offering rising dividends. Here’s Alan Oscroft’s look at two top candidates.

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Vertu Motors (LSE: VTU) shareholders have had a tough time, seeing their shares lose 20% of their value over the past year and 44% over five.

That’s left us with a stock valued at a super low price-to-earnings of 6.5 (based on forecasts for the full year) with a dividend set to yield 5% – and the dividend would be covered three times by earnings. When I see a share as lowly valued as that, I look for indications of trouble.

But examining Wednesday’s interim results didn’t really uncover any. The franchised motor dealerships chain reported a 5.6% rise in total revenues for the period, with like-for-like revenue up 2.3%. Vertu’s adjusted pre-tax profit did dip a little, from £18.1m at the same stage last year to £17.1m, but the company revealed “Excellent cash conversion of profits with free cash flow of £14.6m generated (2018 H1: £1.9m)“, and lifted its interim dividend by 9% to 0.6p per share.

Upbeat

Despite what he described as “a more challenging backdrop,” chief executive Robert Forrester spoke of “continued growth in high margin aftersales revenues and the continued growth in used car volumes” and added that “Cost and excellent working capital control has again been exhibited.”

On the firm’s current outlook, it’s perhaps not surprising that like-for-like new sales were down in September, or that the firm sees the potential impact of Brexit as one of the major factors likely to affect future business.

But with net cash of £6.6m on the books at 31 August, and such negative market sentiment towards the company, I can’t help wondering if I’m looking at an oversold bargain.

Recovery

Just over a year ago, I asked whether Redcentric (LSE: RCN) was a buy after a 30% share price crash. At the time, the IT services firm had just reported disappointing results and had given CEO Chris Jagusz the push, but it was making the right noises about rectifying the problems underlying its first-half underperformance.

At the time I said I’d want to see how the full year went before I’d consider buying. Those results were positive, and the firm was able to announce an improved dividend policy and the commencement of a share buyback, though at the time the share price had already recovered significantly.

Since my November examination, the Redcentric share price is now up 27%, and a trading update Wednesday suggested things are still going according to plan.

Debt

A key measure for a recovering company to me is always its debt level, and I’m seeing significant progress. Even though Redcentric has paid out £1.5m in dividends and has accelerated its capital expenditure in network and infrastructure, net debt at 30 September was down to £16.5m (from £17.6m at 31 March, and £22.6m in September 2018).

The share buyback has been started, but I have to say I’m often sceptical about such things when there’s debt on the books. And in this case, I can’t help thinking the cash could be put to better use paying down debt – to focus on the balance sheet, not on the share price.

Anyway, Redcentric looks like it is pulling off a successful recovery. And though I still wouldn’t buy just yet, I’m keeping my eyes peeled.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.

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