Why this FTSE 250 dividend stock could be one of the best stocks to buy now

Roland Head takes a look at a high street business with strong online growth but wonders whether online-only is the way to go?

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Today I’m looking at an online-only business and one of its big high street rivals that is boosting its online ops. You’d expect the pureplay internet option to look more appealing, but I’m not sure that’s true here.

As I’ll explain, traditional high street businesses with strong online operations can still have a lot to offer investors.

41%+ and counting

Shares of the world’s largest online bingo operator Jackpotjoy (LSE: JPJ) have risen by 41% since its flotation in February 2017. This solid performance has put the £600m firm well ahead of many other shares in which you could invest your money.

However, the stock’s momentum seems to have petered out and the shares have been largely flat since October last year. Even today’s full-year results haven’t moved the needle. The share price was almost unchanged at the time of writing, despite the company reporting a 14% rise in gaming revenue last year.

Investors don’t want to play

One reason for investors’ lack of enthusiasm could be that Jackpotjoy’s adjusted net profit fell by 9% to £76.1m last year. Adjusted earnings per share fell 10% to 102p, leaving the stock on a P/E of about 8.

A second concern is that high levels of debt seem to be preventing the group from paying a dividend. Although adjusted net debt fell by 5% to £387.3m last year, that’s still equivalent to 3.57 times adjusted earnings before interest, tax, depreciation and amortisation (EBITDA).

A net debt-to-EBITDA ratio of more than 2.5 times is normally considered high. Jackpotjoy’s ratio of 3.57 times is uncomfortable in my view, especially as growth doesn’t seem particularly strong.

I’m out

The group’s adjusted earnings are expected to rise by 13% to 115.5p per share this year, leaving the stock on a forecast P/E of just 7.1.

But with a mountain of debt and no dividend, I believe there are better options elsewhere.

A sure winner?

FTSE 250 firm Rank Group (LSE: RNK) is the operator of Grosvenor Casinos and Mecca Bingo. It also operates a number of online brands.

The group’s mix of online and physical venues means that its internet operations have very strong brand recognition, which is helping to drive strong growth.

UK digital revenue rose by 16% during H1, while digital operating profit rose by 56% to £11.4m. That’s almost level with the £12.7m operating profit provided by Mecca venues during the same period.

Despite this, overall revenue growth is slow. Both Grosvenor and Mecca venues saw a fall in visits during the six months to 31 December, limiting growth.

A stock I’d buy now

Rank’s profitability improved significantly during H1. Adjusted pre-tax profit rose by 17% to £40.2m while adjusted earnings climbed 16% to 8p. These gains were matched by cash generation from continuing operations, which rose 19% to £61.9m.

The group ended calendar 2017 with a net cash position of £4m and free cash flow of £65.2m, or 16.7p per share. This covers the forecast dividend of 8p per share twice, making this payout very safe indeed.

Although Rank will need to manage a gradual shift from venues to online, progress so far seems encouraging. With the shares trading on a 2018 forecast P/E of 13 and offering a cash-backed 3.7% yield, I believe this stock deserves 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.

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