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

A pastel colored growing graph with rising rocket.
Investing Articles

How much passive income could I make for every £1,000 invested in Aviva shares?

Even a relatively small investment in Aviva shares could generate much greater passive income, particularly if the dividends are reinvested…

Read more »

Close-up of British bank notes
Investing Articles

I’m considering 100 shares in this FTSE 250 gem to aim for £300 a month in dividends

Mark Hartley outlines why a lesser-known banking stock from the FTSE 250's worth considering for an income portfolio in 2024.

Read more »

Investing Articles

History suggests these UK shares might soar if interest rates are cut in August

Some UK shares could rocket if interest rates fall from its 5.25% high next month. And there's one our writer…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

Here’s why H1 results could boost the AstraZeneca share price

The AstraZeneca share price has been a success story in the past five years. With H1 results due, can it…

Read more »

Investing Articles

£17,365 in savings? Here’s how I’d use it to target a £6,700-a-month passive income

Here's how a lump sum investment could pave the way for me to make a four-figure monthly passive income in…

Read more »

Investing Articles

Down more than 10% in 6 months, Fools are backing these 5 UK stocks to reverse that – and then some! – by 2025

Some of our UK free-site writers have put forward their candidates for turnaround stocks!

Read more »

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »