These FTSE 250 dividend stocks look dangerously overvalued

Royston Wild discusses two FTSE 250 risers (INDEXFTSE: MCX) looking far too toppy.

| 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.

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.

While questions over the consequences of Brexit in the near term and beyond continue to circulate — and are unlikely to be answered for some time yet — investor appetite for stocks that have already been whacked by last June’s ‘leave’ vote has boomed in recent months.

Indeed, embattled outsourcers Capita Group (LSE: CPI) and Mitie Group (LSE: MTO) have both seen their share prices leap in recent months.

Although still trading at an 47% discount to levels seen on the eve of the referendum result, Capita has picked up more recently and touched its highest since November earlier this month. And its FTSE 250 peer has fared even better, a share price spurt this month leading it to trade just 11% lower from levels seen on the day of the EU vote.

Investment questions

But the investment community is being just a bit too hasty jumping back in now, in my opinion. Both companies have had to issue a stream of profit warnings since the autumn as trading activity has slowed down. And recent economic data suggests that the revenues outlooks at both Mitie and Capita remain less-than-compelling.

The Bank of England’s latest inflation report this month led many to claim fears of cooling business investment had been overdone.

The Old Lady of Threadneedle Street suggested that the near-term outlook had improved since its last report in February, with supportive credit conditions, resilient demand and the incentive created by weak sterling for exporters to invest prompting businesses to pull out their chequebooks once again.

However, the Bank noted that “a number of exporters and foreign‑owned firms remain cautious about larger investment decisions due to uncertainty around future UK trading arrangements.” And it said that this caution could be set to persist, adding that “uncertainty surrounding the United Kingdom’s future trading arrangements is likely to weigh on firms’ investment intentions in coming years.”

Lasting woe?

With no signs of an imminent upturn in spending, the City expects Capita to endure a 4% earnings fall in 2017, following on from last year’s 20% slide. And given the possibility that this bottom-line weakness could well last beyond this year, and these forecasts suffer severe downgrades in the months ahead, I do not think a forward P/E ratio of 10.5 times is attractive enough to tempt savvy investors.  

Likewise, Mitie Group is predicted to have suffered a shocking 50% earnings drop in the year to March 2017, although it is expected to rebound with a 31% rise in the present period. However, this forward projection still creates a shockingly-high P/E multiple of 14.6 times and, given that conditions are still yet to improve on the ground, this heady rise looks a tad optimistic to me.

The business advised just last month that revenues flatlined in the last fiscal year, “reflecting what has been a challenging environment.”

Patchy projections

Given this backcloth, I think stock pickers should ignore predictions of chunky dividends and invest elsewhere. And they are undeniably chunky. In 2017 Capita is anticipated to maintain the 13.7p per share of the past two years, yielding 5.7%.

Mitie, meanwhile, is predicted to bounce from a severe dividend cut (a 7p payout is expected for fiscal 2017, down from 12.1p in the prior year) and to lift the reward to 7.8p. This forecast yields a market-beating 3.7%.

But until more clarity surrounding the UK economic outlook becomes apparent, I believe both outsourcers are a risk too far at present.

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.

Royston Wild has no position in any 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

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »