Why I'd sell this growth stock to buy this FTSE 100 dividend stock

Why I’d sell this growth stock to buy this FTSE 100 dividend stock

The risk/reward ratio of this FTSE 100 (INDEXFTSE: UKX) income stock could be significantly higher than this falling growth stock.

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 30 April, 2018 10:35 am BST

| More on: KGFTENG

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.

With the FTSE 100 trading close to its all-time high after a recent surge, investors may be finding it more challenging to find shares that offer favourable risk/reward ratios. After all, when valuations are higher, the potential reward on offer can decline, while the risk of buying a stock at a price that is too high may increase.

However, there are still a number of shares which appear to offer appealing rewards given their level of risk. With that in mind, here’s one dividend share I’d buy, as well as one declining stock that could be a company to avoid at the present time.

Improving outlook

While the retail sector has experienced a difficult recent past, its prospects seem to be improving. B&Q owner Kingfisher (LSE: KGF) could enjoy a strong return to growth after a mixed period, with the company’s bottom line forecast to rise by 17%-18% per annum over the next two financial years.

One reason for this is the improving outlook for the UK economy. Specifically, UK consumers are expected to see their disposable incomes rise in real terms, since inflation has now fallen below wage growth for the first time in over a year. This could lead to improving consumer confidence and may mean that spending on non-essential items increases at a fast pace.

Of course, Kingfisher is an internationally-diversified business. The UK, though, continues to make up a sizeable proportion of its revenue, while the chance of improving operational performance elsewhere under its current strategy could lead to stronger overall profitability.

A rising bottom line means that dividend growth could be brisk. Kingfisher is expected to post a rise in dividends per share of 23% during the next two years. This puts it on a forward yield of 4.3% and suggests that it may offer strong income prospects for the long term.

Disappointing performance

In contrast, the risk/reward ratio for technology-enabled lifestyle and travel platform company Ten Lifestyle (LSE: TENG) appears to be less attractive. It reported a disappointing trading update on Monday, with it stating that net revenue for the 2018 and 2019 financial years is now forecast to be £6m and £10m below previous expectations.

This is due to the length of time between a contract tender, win and commencement of revenue being longer than anticipated. The impact of this on the company’s EBITA (earnings before interest, tax and amortisation) is due to be negative, with its profitability now expected to be below expectations in 2018 and 2019.

While Ten Lifestyle is making progress with operational improvements and has been able to win new contracts of late, its shares have fallen by over 25% on the profit warning. As such, its stock price could be highly volatile over the medium term. Coupled with its lower-than-expected revenue and profit outlook, it appears to be a stock to avoid at the present time.