A FTSE 100 dividend growth stock I’d buy today and one top performer I’d consider selling

Why I’d recycle my profits from this small-cap into this evergreen FTSE 100 (INDEXFTSE: UKX) big-cap.

| 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.

Investors have enjoyed a terrific ride since antibody supplier Bioventix (LSE: BVXP) arrived on the FTSE AIM market in April 2014. I first wrote about the firm that October when the share price was 680p, the forward price-to-earnings (P/E) ratio was 16, and the forward dividend yield was 3.9%. Back then, I thought the valuation looked modest “for such a fast-growing business.”

Strong performance

Fast-forward four years to today and the valuation no longer looks modest. The current share price of around 3,000p puts the forward P/E ratio at 30 and the forward dividend yield at 2.4%. I think this outcome is a good example of how a valuation re-rating can really turbocharge investor returns when a good growth story becomes accepted by the investing community.

Of course, Bioventix has earned its re-rating. Over four years, revenue is up over 125%, earnings are more than 200% higher, and the normal dividend is almost 100% higher. Throughout the period, the firm’s quality indicators have been mind-bogglingly good, and the whole set-up screams ‘special’, so I can see why many investors have clung tightly to their shares. However, there’s no denying that the now-racy valuation raises the stakes.

Meanwhile, Bioventix keeps pumping out good figures. Today’s full-year results reveal revenue up almost 21% compared to the equivalent period last year, and pre-tax profit lifting 19%.

The firm’s debt-free balance sheet is a joy to behold and the cash pile rose by £0.8m to £7m. The money is more than the directors need to finance further growth, so they declared a special dividend of 55p per share, to be paid on top of a second interim dividend of 36p, itself up 16% on last year.

The company remains a quality outfit but forward earnings growth expectations are now the item that’s ‘modest”, cooling from the robust double-digit advances we’ve been seeing from the firm. If I still held shares in Bioventix I’d cash in my chips now to nail down my gains because I think the shares could drift lower as operational progress catches up with the valuation.

A decent long-term bet?

Instead of Bioventix, I’m tempted by FTSE 100 medical technology company Smith & Nephew (LSE: SN), which supplies joint replacements for knees, hips and shoulders; tools for minimally invasive surgery; advanced wound dressings; plus nuts, bolts, plates and other items for trauma surgery – all good stuff with apparent evergreen demand in today’s world.

The firm’s progress with revenue, profits and cash flow has been steady, albeit unspectacular, over the past few, which reflects in a keener valuation than we are seeing with Bioventix. At today’s share price close to 1,340p, the forward P/E ratio for 2019 sits at just over 17, and the forward dividend yield is a little over 2.1%. For that price, I see Smith & Nephew as equally exposed to the benefits of potential upside surprises as it is to downside risks, which is a fair proposition. I’d be happy to tuck some of the shares away for the long term.  

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.

Kevin Godbold 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 Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »