This dividend stock could return 30%+ by 2019

Buying this income share today could prove to be a sound move.

| 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.

A dividend stock which could offer over 30% in capital gains within two years may seem unlikely. After all, many investors consider dividend stocks to be somewhat stale when it comes to capital growth potential. However, reporting on Friday was a stock which alongside its 5.7% dividend yield could offer stunning share price gains between now and 2019.

Improving performance

The company in question is motor and home insurance specialist Esure (LSE: ESUR). It recorded a rise in gross written premiums of 19% in 2016, with in-force policies up 8.6% to 2.174m. This enabled it to post a rise in underlying profit after tax of 18%, which pushed total dividends higher by 2p per share to 13.5p. This means that the company now has a payout ratio of 70% of underlying earnings per share, which is inclusive of a 20% special dividend.

Esure’s combined operating ratio increased by 1 percentage point to 98.8%, while the business appears to have a strong capital position. Its Group coverage stands at 149% versus 123% last year and with the demerger of GoCompare.com having been successfully completed, it seems to be well-placed to deliver improving financial performance in future years.

Growth potential

While Esure’s earnings are due to fall by 13% in 2017, the company is forecast to return to positive growth in 2018. Its bottom line is expected to move 8% higher next year, which indicates that investor sentiment could begin to improve. This has the potential to push the company’s price-to-earnings (P/E) ratio higher than its current level. Since it trades on a P/E ratio of 12.4 versus a historic average of 22.6 over the last four years, an upward re-rating seems to be relatively likely.

If Esure was to revert to its historic average P/E ratio and meet its forecasts for the next two years, its shares could be trading as much as 72% higher than they are today. Clearly, this is an ambitious target, so investors may wish to include a margin of safety in case the company’s outlook is downgraded. As such, a capital gain in excess of 30% by 2019 does not appear to be overly optimistic.

Sector potential

While Esure could prove to be a strong buy for the medium term, sector peer Admiral (LSE: ADM) could offer even greater growth potential between now and 2019. It is forecast to record a rise in its bottom line of 37% in the current year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.5, which compares favourably to Esure’s PEG ratio of 1.4. As such, there seems to be a wider margin of safety on offer with Admiral’s shares when compared to those of its sector peer.

Furthermore, Admiral currently yields 5.9%. This is 0.2% higher than its sector peer’s yield and since Admiral has a track record of relatively stable dividends, it could prove to be the more reliable dividend stock in the long run. Both companies could suffer from changes to the personal injury discount rate in the short term, but they seem to offer strong growth prospects 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.

Peter Stephens owns shares of Admiral Group. The Motley Fool UK has no position in any of the shares mentioned. 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

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »