Retire wealthy: why I’d buy this FTSE 100 dividend growth stock today

A recent sell-off has created a compelling buying opportunity in the FTSE 100 (INDEXFTSE:UKX), says Roland Head.

| 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.

One of the biggest fallers in the FTSE 100 this week is Chilean copper miner Antofagasta (LSE: ANTO) after a downbeat set of half-year figures.

Today I want to explain why I think sellers of this family-owned firm have acted too fast. I also want to take a look at a small-cap mining services firm which I rate as a potential buy.

Copper blues

The price of copper has fallen by about 20% so far this year. That’s not been good news for copper miners. A second concern is the risk of falling demand from China, if the Asian giant’s trade war with the US escalates.

There’s no way of knowing what will happen over the next year or two. But there’s a fairly widespread view among analysts that copper demand is likely to exceed supply from 2020, as demand from renewable energy and electric vehicles surges.

The best way to buy copper

For investors wanting a pure play on copper, I believe Antofagasta could be the best choice. This FTSE 100 firm is generally seen as a high quality, low-cost operator. In 2017, it generated an operating margin of 40% and return on capital employed of 15%. Both are decent figures.

Net cash costs were $1.52/lb during the first half of the year, compared to an average copper sale price of $3.00/lb.

Management has maintained its full-year guidance for net cash costs of $1.35/lb. This should leave plenty of room for profit, even if copper falls below its current level of $2.60/lb.

Antofagasta’s profits are helped by a strong balance sheet. Net debt was just $781m at the end of the half year. That’s just 0.3 times earnings before interest, tax, depreciation and amortisation (EBITDA). Very low indeed.

The shares now trade on 13.5 times forecast earnings, with a well-covered 3.2% dividend yield. I think this could be a rare opportunity to buy this respected miner at an attractive price.

Drilling from east to west

Africa-based drilling contractor Capital Drilling (LSE: CAPD) appears to be betting big on a mining boom in West Africa. The stock’s 9% fall today suggests that not all investors are convinced.

In its half-year results, Capital said that utilisation of its drilling fleet fell from 56% to 46% during the period, because it was busy moving drilling rigs from East to West Africa. Half-year revenue fell by 12.5% to $54.5m, compared to the same period last year.

This commitment to West Africa isn’t without risk. But Capital Drilling is an Africa specialist and has a good record of growth. Having started out in Tanzania in 2005, today the company has a fleet of 94 drilling rigs.

The company also has $3.4m of net cash on the balance sheet, despite the recent mining downturn. Profitability is generally good and operating margins have now returned to double-digits, hitting 10.6% during the first half.

Buy ahead of new growth

Capital Drilling’s management says that there’s a growing level of mining activity in West Africa. It signed three new contracts in the region during the first half and expects rig utilisation to improve during the second half of the year.

After today’s fall, this stock trades on 13 times forecast earnings with a well-supported 4% dividend yield. I believe now could be the right time to buy, ahead of the next stage of growth.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

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

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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 »