A dividend stock and a growth stock I’d buy in February

Edward Sheldon identifies a dividend powerhouse and a growth stock that offer value at present.

| 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.

With the FTSE 100 index hovering around the 7,200 point mark, I’m not seeing a great deal of value among large-cap stocks right now. Having said that, here’s a look at two that I believe have strong potential, one that pays a formidable dividend and another with compelling growth prospects. 

Dividend powerhouse 

For a sizeable dividend yield at a reasonable valuation, it’s hard to look past Legal & General Group (LSE: LGEN). The insurer paid out a generous 13.4p per share in dividends for FY2015, and City analysts forecast FY2016’s payout to be an even higher 14.3p per share, equating to a yield of 6% at the current share price.  

The 6% mark is a level in which some investors can get a little twitchy, fearing that a dividend cut may be forthcoming. However, with earnings of 21.1p per share forecast for FY2016, the insurance giant sports a dividend coverage ratio of just under 1.5, suggesting that there’s no need to hit the panic button just yet.  

Several brokers believe Legal & General’s share price can climb higher, with RBC Capital Markets, Barclays and HSBC placing price targets of 300p, 282p and 275p on the stock, respectively. Despite rebounding 45% since the Brexit vote, Legal & General still looks like a good value stock pick in my opinion, given its undemanding P/E ratio of 11.3.

Long-term growth story 

For those less interested in dividends, and more focused on generating strong capital growth, I reckon Hikma Pharmaceuticals (LSE: HIK) has a huge amount of potential. 

It develops and manufactures a broad range of branded and non-branded pharmaceutical products across the US, Europe and the MENA region and has a portfolio of over 550 healthcare products. Furthermore, after making several key acquisitions in the last few years, the company has many more products in the pipeline, and this should drive revenue growth. As such, Hikma looks to be an excellent play on the ageing population theme and I believe that long-term investors will be rewarded.

The drugs specialist has had a volatile year, with its share price spiking higher after the Brexit result, only to fall significantly after an August profit warning. However the share price now looks to be trending up again, and I believe there’s plenty more to come.

While FY2016 earnings are expected to fall to $1.04 per share, analysts envisage earnings momentum picking up in FY2017, and consensus earnings per share estimates are currently $1.41 for FY2017. That places the stock on a FY2017 P/E ratio of around 17, which seems reasonable for a company that has nearly doubled its revenues in the last five years alone.

Broker sentiment towards Hikma is largely positive, with several analysts calculating price targets around the 2,500p mark, and I share their enthusiasm, believing that there’s a compelling long-term growth story at play here.

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.

Edward Sheldon owns shares in Legal & General Group. The Motley Fool UK has recommended Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »