One dividend knockout I’d buy instead of Telit Communications plc

Roland Head highlights a hi-tech alternative to Telit Communications plc (LON:TCM).

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Shares of machine-to-machine wireless technology firm Telit Communications (LSE: TCM) are still worth about 195% more than they were five years ago. But there’s no doubt that this year’s performance has been disappointing.

At the start of August, the shares crashed following a poor set of interim results and a profit warning. This bad news was followed by the company finding “evidence” that former chief executive Oozi Cats had been the subject of an indictment in the USA.

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Telit shares have fallen by 33% so far this year. Should shareholders cut their losses, or can the firm turn things around?

Pros and cons

The group says it is confident of delivering sales growth of 15% next year, and some City analysts appear to agree.

The most recent consensus forecasts suggest Telit’s sales will rise by 12% in 2018, while net profit is expected to climb 50% to £31m. These figures put the stock on a forecast P/E of 10, with a pencilled-in dividend yield of 3%.

However, the latest accounts looked poor to me. The group slumped to a first-half loss of $6.7m, compared to a profit of $4.7m for the same period last year. Costs appear to have risen rapidly, and the group reported a cash outflow from operations of $3.3m.

Indeed, on 14 August Telit said that interim CEO Yosi Fait would be “conducting a preliminary review of the Group’s activities and cost base”. To me, this sounds like an acknowledgment that cash is tight.

I’m also concerned about management credibility. Corporate culture tends to start at the top, in my view. It’s worth noting that Mr Fait sold a total of £1.5m worth of shares on 28 June and 3 July, just six weeks before the shares crashed following August’s profit warning.

I don’t see any reason to take the risk of investing in Telit, when so many better options are available elsewhere.

An electrifying surprise

Specialist chemical group Johnson Matthey (LSE: JMAT) closed up by 14% on Thursday, after the group announced plans to invest £200m on expanding its Battery Materials division.

The company believes the battery market could be worth $30bn per year by 2020, when it expects electric vehicle penetration to have reached 10%.

Clearing the air

Johnson Matthey produces one third of the world’s catalytic convertors. Investors have been concerned about the growth outlook for this business, but management said on Thursday it continues to expect “sustained” growth from this division.

The collective effect of these changes is expected to boost the group’s return on invested capital to 20% over the medium term. Earnings per share growth is expected to be sustained at “mid-to-high single-digit” percentage levels.

The group’s progressive dividend policy will be maintained, suggesting that shareholders will continue to enjoy above-inflation dividend growth each year.

Although Johnson Matthey stock isn’t as cheap as it was a week ago, the shares are still broadly flat on the year to date. Debt levels are low and although the dividend yield of 2.6% is below average, it was covered 2.6 times by earnings last year.

In my view this is one of the safest dividend stocks in the FTSE 100, and continues to deserve a buy rating.

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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.

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 considered, so you should consider taking independent financial advice.

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