Could this pharma stock help you become an ISA millionaire?

Roland Head considers two potential ISA buys ahead of this year’s April deadline.

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Investing in long-term dividend growth stocks within an ISA can be a great way to build wealth. You don’t have to pay capital gains tax if you sell and you can also receive dividends free of income tax.

Today I’m looking at two potential dividend growth buys. Can either of these stocks help you retire rich?

A growth market

The ageing populations of most developed countries should be good news for ConvaTec Group (LSE: CTEC), which produces a range of disposable products needed by patients with chronic conditions such as incontinence and stomas.

The group’s focus is on products which require regular repeat purchases, and where demand is expected to grow. ConvaTec’s share price initially performed strongly after its flotation in 2016, but the stock fell sharply in October last year after it warned that sales would fall below expectations due to supply disruptions.

A buying opportunity?

This fall could be a buying opportunity. The group’s recent results showed a fairly stable performance in 2017. And although supply problems are expected to impact sales during the first half of the year, organic sales are still expected to rise by 2.5% to 3% in 2018.

Analysts expect adjusted earnings to rise by 12.5% to 18 cents per share in 2018, putting the stock on a forecast P/E of 15.3. The dividend is expected to climb 20% to 6.8 cents per share, giving a prospective yield of 2.5%.

ConvaTec’s net debt remains a little too high in my view, at $1.5bn or 3 times EBITDA. But cash generation is generally good, which should help with debt reduction. If you buy into this company’s structural growth story, the current share price could be a decent entry point.

Specialist services

Cambian Group (LSE: CMBN) provides a range of specialist services to support children with behavioural problems and learning difficulties. Its share price slipped 4% lower today after the group reported a pre-tax loss of £9m for 2017.

This loss was the result of £11.2m of exceptional costs incurred last year, as the company repositions itself to focus on higher severity services, which are presumably more profitable.  

Stripping out these one-off costs gives an adjusted pre-tax profit of £2.2m for 2017, compared to a loss of £0.4m for 2016. The group’s after-tax adjusted earnings rose by 50% to 3.6p last year.

Cash returns

Cambian sold its Adult Services division at the end of 2016. Much of the cash from this sale was used to repay debt. Most of the remaining cash has now been returned to shareholders, who received a special dividend of £50m (27.1p per share) in 2017. A further £15m (8.2p per share) was returned to shareholders in February.

I’m pleased that management is showing discipline and returning surplus cash to shareholders. However, it does leave me wondering whether the company’s expansion opportunities may be limited.

My view

Chief executive Saleem Asaria says that 2018 will be “a year of consolidation” that’s needed before the company can return to growth. City analysts expect the group’s adjusted earnings to rise by 80% to 6.3p per share this year, and are forecasting an ordinary dividend of 2.9p.

These figures put the stock on a forecast P/E of 32 with a prospective yield of 1.4%. Given the uncertainty over future growth, the stock looks too expensive to me. I’d like to know more before considering an investment.

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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