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

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

| 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.

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.

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.

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

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 »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »