Why G4S isn’t the only FTSE 100 dividend stock I’d buy today

Roland Head reviews the latest figures from G4S plc (LON:GFS) and highlights another FTSE 100 (INDEXFTSE:UKX) stock he’d buy for income.

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.

Today I’m looking at two of the smaller companies in the FTSE 100. Both have been through difficult turnarounds, but now seem to be in a good position to deliver sustainable growth. Despite this, the market remains cautious although both shares look potentially cheap to me.

Making good progress

Outsourcing group G4S (LSE: GFS) is shifting its focus towards cash handling and technology-based security. Over time, this should help the firm move away from low-margin work that requires a high headcount. It’s a strategy that seems to be working well.

Last year saw the group’s revenue rise by 3.1% to £7.8bn, while adjusted after-tax profit rose 6% to £277m. Analysts expect profits to rise by another 7% to £295.5m in 2018.

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

See the 6 stocks

So far this year, the group has signed new contracts adding £500m to annual revenue, compared to £1.4bn for the whole of 2017. A key area of growth is the group’s North American cash solutions business, which handles cash for retailers. The group reported another “major contract win” in February and said the division has “a large sales pipeline”.

Why I’d buy

I was very encouraged by the improvement in G4S’s profitability last year. Return on capital employed — a measure of profit compared to money invested in the business — rose from 12.2% in 2016 to 16.7% in 2017. That’s above the benchmark of 15% I use to screen for highly profitable businesses.

Looking ahead, the group’s earnings are expected to rise by about 8% to 19.3p per share in 2018. This puts the stock on a forecast P/E of 13 with a prospective yield of 3.8%. In my view this is likely to be a good level to buy for a long-term income holding.

Another successful turnaround

Shares at insurer RSA Insurance Group (LSE: RSA) have risen by more than 50% since the start of 2016, as the turnaround led by chief executive Stephen Hester has delivered impressive results. Since taking charge in 2014, Hester has sold non-core businesses, cut costs, and boosted growth in core markets such as the UK, Canada and Scandinavia.

Last year saw the group achieve a combined ratio of 94%. This is a measure of underwriting profit, which shows how much is left from the group’s premium income after operating and claims costs have been subtracted. Last year’s figure of 94% was a new record for RSA, a pretty good figure for any mainstream insurer.

Profitable and cheap?

The combined ratio is a useful measure of profitability. But insurers also invest their premium income in the hope of achieving higher returns. A better measure of the overall profitability of the business is return on tangible equity, which measures after-tax profit against its tangible book value.

RSA’s return on tangible equity rose from 14.2% to 15.5% last year. That’s towards the top end of the company’s target range of 13-17%, a good result in my view.

Analysts’ consensus forecasts suggest that the group’s underlying earnings will rise by 15% to 50.2p per share this year. The dividend is expected to rise by nearly 50% to 28.7p per share. These projections put the stock on a forecast P/E of 12.8 with a yield of 4.5%. I’d rate the shares as a buy at this level.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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 »