This high-yielding stock is trading at a bargain-basement valuation

This under-the-radar growth and income star is trading at a very attractive valuation.

| 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.

Until the downturn in oil & gas markets forced it into keeping dividend payouts level last year, energy consultancy RPS Group (LSE: RPS) had strung together 21 consecutive years of increased dividend payments. For any company exposed to the sector to even maintain payouts last year was a feat in itself and its 3.65% yield should not be sneezed at.

And half-year results released this morning bode well for income investors for several reasons. The first is that the interim payout was hiked from 4.66p to 4.8p year-on-year (y/y). The second is that management’s decision this time last year to halt acquisitions and focus on de-leveraging the balance sheet has worked well. The group’s net debt-to-EBITDA ratio has fallen from 2.2 times to 1.5 times y/y and management is now confident the balance sheet is healthy enough to increase dividends as well as to resume looking for suitable acquisitions.

With a resumption of the group’s acquisition-led growth policy, investors have good reason to expect rising earnings and eventually rising dividends in the near future. A return to buying up small consultancies in Europe, Australia and North America is also to be welcomed as it will allow the company to further reduce its dependence on the oil & gas sector. Management had already been doing this with all of its £124m spent between 2014 and 2016 on acquisitions directed to companies without direct exposure to oil & gas markets.

This strategy is already paying off as sales and profits returned to growth in H1 boosted by the weak pound and high activity from its property development and management businesses in the UK. With about 18% of fees in H1 coming from businesses in the oil, gas and Australian resources sector, RPS is still exposed to weakness in these markets. But with the balance sheet back in good shape, management looking forward to further acquisitions and a resumption of dividend payment growth, RPS could be a relatively safe way to gain exposure to these sectors for growth and income investors.

Too risky?

Another company with a solid history of dividend growth is agricultural products and engineering firm Carr’s Group (LSE: CARR), which from 2012 to 2016 increased dividends per share by 30% to 3.8p so that they now yield 2% annually.

Unfortunately, reliable dividend growth hasn’t been matched by stable earnings growth due to the cyclical nature of the agricultural bit of the business. As earnings from the agriculture division fluctuated based on dairy and raw material prices, they had an outsized effect on group results since they accounted for roughly 90% of revenue last year.

While the engineering division should be more reliable, it’s also not without its faults as a delayed contract caused a profit warning in March and led analysts to forecast a 20% fall in earnings for the current fiscal year. This contract has now been signed, but the delay will likely severely impact the already low group operating margins that were just 4% last year.

Stocks that are cyclical or very low-margin always make me apprehensive. The combination of both in Carr’s Group, together with a pricey valuation of 16 times forward earnings, will have me taking a hard pass on the company’s shares.

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.

Ian Pierce 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

Young woman wearing a headscarf on virtual call using headphones
Investing Articles

With £100 to invest, is it better to buy 26 Tesco shares or 159 shares in Lloyds?

Owning 159 shares in Lloyds Banking Group sounds like a big investment. But as Stephen Wright explains, there’s a lot…

Read more »

Investing Articles

Here’s why I’m buying FTSE 100 shares not S&P 500 stocks

Christopher Ruane has bought S&P 500 shares and may do so again. But for now, he's more focused on this…

Read more »

Investing Articles

Will Tesla stock keep going downhill?

Tesla stock's crashed by over a fifth in a matter of weeks. Our writer explains why he still sees it…

Read more »

Thin line graph
Investing Articles

This US growth stock crashed 99%… then soared 6,398%!

Our writer considers what on earth's driven one large US growth stock down 99% and then up almost 6,400% in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 brilliant pieces of investing wisdom from Warren Buffett

Warren Buffett's made many billions of dollars by investing in well-known blue-chip shares. Here are three pieces of his investing…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With just £5 a week to spare, here’s how someone could start investing – and aim big!

Our writer explains how a stock market beginner could start investing by buying blue-chip shares for less than a pound…

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Dividend Shares

2 retirement shares that long-term investors should consider for steady income

Ken Hall takes a look at two big-name retirement shares in the FTSE 100 with market-leading positions and track records…

Read more »

UK money in a Jar on a background
Investing Articles

With a 10.1% yield, should I buy this FTSE 250 income stock?

Our writer looks at an income stock that’s kept its dividend unchanged for five years. But is it high enough…

Read more »