One dividend star I’d buy today, and one I’d sell

Here’s one dividend that looks set to soar, and one that could come crashing down.

| 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 thing that’s better than a stock paying a good dividend now, is one that will pay a progressively bigger dividend over time. And I think I see one in the shape of Spirent Communications (LSE: SPT).

It provides testing and performance analysis technology to the communications industry, and that’s a profitable business. And though earnings have been erratic over the past few years, the dividend has been growing steadily.

The share price shed 4.5% on Thursday morning, despite first-half adjusted operating profit climbing by 67% to $17.4m and adjusted EPS putting on 86%.

Perhaps unchanged revenue figures or the interim dividend being pegged at 1.68 cents caused some disappointment, but I’m very encouraged to see free cash flow more than doubling to $28.7m.

Although the exit of some non-core product lines, plus delays in Ethernet testing, mean that revenue should be flat, full-year profit expectations remain unchanged, according to chief executive Eric Hutchinson.

Solid growth

That suggests the analysts’ consensus for a 29% rise in earnings for 2017 is on the ball, with a further 15% currently suggested for 2018. The share price has climbed over the past year, to 116p, giving us a forward P/E of 22 (dropping to 19 for 2018), and there’s been some boost based on takeover rumours.

But with growth set to continue (and a PEG of a modest 0.8), I see that as a decent valuation for a growth share. But more to the point, I think above-inflation dividend rises should take the currently-expected 2.5% yield to something very attractive in the coming years.

With cover by earnings set to grow even faster, and Spirent throwing off lots of cash, I really do see a future dividend star in the making here.

Under pressure

I wish I could say the same for Inmarsat (LSE: ISAT), but my confidence in the satellite communications firm’s dividend is waning.

We’re looking at mooted yields of better than 5.5% this year and next, but the pressure is building as EPS is expected to drop by 30% leaving dividend cash badly uncovered — and even an 18% EPS recovery indicated for 2018 would still leave cover at only 90%.

Though first-half revenue rose by 9.4%, largely due to contracts with various governments, adjusted profit after tax dropped by 10.3%. And the share price dropped by 3.3% to 762p in early trading as a result.

I am convinced that Inmarsat has a healthy long-term future, being one of the world leaders in its field (and with very high barrier to entry — satellites don’t come cheap), but the medium term looks like it could be erratic.

Volatility to come?

The firm said that “whilst we have delivered a robust performance in recent quarters, our markets remain challenging and the outlook continues to be difficult to predict,” and there are uncertainties over shorter-term government business.

Inmarsat did raise its interim dividend by 5% to 21.62 cents per share which would suggest confidence in its viability, and a scrip scheme introduced in 2016 should take some pressure off the demand for cash. 

But at this stage, with a forward P/E of 22 while earnings are expected to fall, I just see this as a risky bet for those looking for reliable progressive dividends — and Inmarsat is not a buy for me right now.

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.

Alan Oscroft 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

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

£9,000 in savings? Here’s how I’d target a £14,616 annual passive income with M&G shares!

Big passive income can be generated over time with 9.5%-yielding M&G shares, especially if the dividends paid are used to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

If I’d put £1k in this FTSE 100 stock five years ago, here’s how much I’d have now!

Mark David Hartley works out what sort of profit he’d have made by investing in this FTSE 100 pick pre-pandemic.…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »