One 6% dividend stock and one growth stock I’d buy and hold forever

Roland Head compares two companies from the same sector that could be good picks for either income or growth.

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The last few years have been difficult for pub chains but one group has bucked the trend. Shares of J D Wetherspoon (LSE: JDW) have risen 98% over the last five years, while rival groups such as Greene King (LSE: GNK) and Mitchells & Butlers have fallen by 20% or more.

Today I’m looking at the investment case for Wetherspoons and considering my favoured alternative, Greene King. Which should you choose as the weather starts to warm up?

Social media shutdown

Brexit-backing Wetherspoon’s chairman Tim Martin is an outspoken founder-boss of the type that’s increasingly rare at big-cap companies. His latest headline-grabbing move is to announce that the firm will close all of its social media accounts.

Commenting on the decision, Martin said: “I don’t believe that closing these accounts will affect our business whatsoever.” I’m inclined to agree with him. The group’s brand and offering are widely known and understood. Exiting social media won’t change that.

The right time to buy?

Not everyone likes Wetherspoon pubs. But the firm’s financial results over the years suggest that Martin and his team are very good at what they do.

Operating profit has risen from £91.5m in 2013 to £128.5m in 2017. The group’s recent half-year results showed that this measure of profit rose by 13.6% to £74m during the six months to 28 January.

Despite facing rising costs, the operating margin has remained stable, at between 7% and 8%. Cash generation has also remained strong.

Wetherspoon’s pub estate is no longer expanding. Spending is now focused on buying the freeholds of leased sites and refurbishing existing sites. This should help to deliver long-term financial benefits, although it’s causing a short-term rise in debt.

Although I’d like to see borrowing fall, I think the firm’s gearing is still in an acceptable range. And while the group’s 1% dividend yield doesn’t appeal to me, forecast earnings growth of 5% this year suggests to me that the shares could continue to outperform.

Brewing a turnaround

When Greene King issued a 49-week trading statement on 12 April, the company’s shares started climbing. They’ve not yet stopped and are now worth nearly 25% more than they were one week ago.

Is it too late to buy into this turnaround? I don’t think so, as trading appears to be stabilising.

Although like-for-like sales fell by 1.8% during the 49 weeks to 8 April, some of this was due to poor weather over the last 12 weeks. Easter saw a marked improvement, with like-for-like sales up by 2.8% compared to the same period last year.

There’s more to come

Greene King still faces some challenges. In my view it’s too soon to say whether sales have returned to sustained growth. And as with Wetherspoon, the group’s net debt is slightly higher than I’d like to see.

However, management confirmed last week that plans to cut costs by £40m-£45m were “on track”. Proceeds from the sale of unwanted pubs are “likely to be ahead of expectations” and the company has continued to spend money on keeping its pubs updated.

Greene King’s valuation still looks undemanding to me. The shares trade on 8.8 times 2017/18 forecast earnings, and with a prospective yield of 5.9%. I’d keep buying after last week’s news.

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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