Two troubled FTSE 250 dividend stars: should you buy them?

These shooting stars have traced an erratic path lately, says Harvey Jones.

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.

Every star has its dark side. The following two FTSE 250 high-flyers have seen almost as many lows as highs lately. Where might they go next?

Saint and sinner

St Modwen Properties (LSE: SMP) styles itself as the UK’s leading regeneration specialist, with a 30-year track record in commercial and residential developments. The company has a market cap of £793m, a current portfolio value of £1.75bn and more than 100 projects underway. It aims to build business parks and town centres on former industrial estates and disused brownfield sites, with projects including the £1bn Longbridge scheme, and the £450m Bay Campus Swansea University revamp, which it now plans to sell.

Its share price has seen plenty of volatility, it currently trades 8% lower than it did three years ago, yet is up 116% over five years. Like many developers, St Modwen has recovered well since Brexit, and now stands 20% higher than six months ago. It recently hiked its dividend 4.3%, lifting it from 5.75p to 6p a share, and now trades on a forecast yield of 1.8%, nicely covered four times.

Resilience

On Wednesday, chief executive Mark Allen announced that St Modwen is to accelerate its commercial development activity and grow its residential and housebuilding business, building on a positive start to the year. He said the firm’s portfolio and wider business has shown “resilience in the face of broader market uncertainties,” and after Thursday’s election shock, that claim is about to be put to the test.

The current valuation of 14.8 times earnings looks reasonable enough, but the forward valuation is higher, at 18.8 times, thanks to a projected 25% drop in earnings per share (EPS) in the year to 30 November 2017. Growth of 3% is expected after that. However, St Modwen’s 35.9% operating margins and price-to-book (P/B) ratio of just 0.8 offer cause for comfort. Its halo may have slipped lately, but it can still shine.

Who’s Nex?

Nex Group (LSE: NXG), formerly ICAP, provides trading platforms, tools and expertise for global banks, asset managers, hedge funds and corporates. Its share price has been trading positively, up 26% over the past 12 months, as the company has boosted revenues and profits, while simultaneously warning that activity has been subdued.

In May, the financial broker posted a healthy 18% rise in full-year revenues from £460m to £543m, with statutory pre-tax profit spiralling from £27m to £120m. It also sold ICAP Global Broking to TP ICAP for £1.3bn, which chief executive Michael Spencer claimed delivered exceptional value to NEX shareholders. However, he also warned of a tough market environment, with trading down due to low market volatility.

Going for broke

Nex doesn’t look so cheap trading at 27.97 times earnings. However, it does trade on a low forecast price-to-earnings growth (PEG) ratio of just 0.7, which suggests it is undervalued. The dividend looks tempting with a yield of 5.9%, but watch out, that is forecast to fall to 2.1%.

Anticipated EPS growth of 31% in the year to 31 March 2018, followed by 19% the year after, do inject an element of excitement. I am also impressed by plans to increase operating margins to at least 40% in 2017/18, a large increase from 27.8% today. It could be an exciting play if market volatility returns. As it may. 

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.

Harvey Jones 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

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »