I’d still buy FTSE 100 growth dividend star Paddy Power Betfair despite this news

I believe Paddy Power Betfair plc (LON: PPB) remains a compelling FTSE 100 (INDEXFTSE: UKX) stock despite a disappointing update. This is why.

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Paddy Power Betfair’s (LSE: PPB) share price took another thumping whack on Wednesday following a less-than-positive reaction to first quarter financials.

The Footsie stock was last dealing 6% lower on the day and at levels not seen since August. The gambling giant has now lost a whopping 23% of its value since the beginning of 2018. But rather than being bearish myself, I reckon this represents a great opportunity for savvy investors to grab a slice of a blue-chip star.

Down but not out

Investors have taken fright today after Paddy Power Betfair announced that revenues dropped 2% during the three months to March, to £408m, and that underlying operating profit plunged 12% to £80m.

It commented that weakness in horseracing was a major contributor to the drop in turnover and caused a 1% fall in sport revenues. More specifically the FTSE 100 firm cited “the high level of weather-related cancellations” which caused a 14% drop in the number of races run in the UK and Ireland during January-March, a sharp acceleration from the 4% fall reported a year earlier.

The ‘gee-gees’ were not the only problem in the first quarter. The business was also adversely affected by the string of “bookmaker friendly” football results from November to February which dented punter appetite to continue placing bets.

While disappointing, I do not believe today’s results should be prompting investors to cash out. As my Foolish colleague Harvey Jones pointed out quite recently, the huge investment the company is making in foreign markets may be costly but this is providing some brilliant earnings-growing possibilities for the years ahead.

In Australia and the US, revenues rose 6% and 23% respectively during Q1, illustrating the brilliant prospects in far-flung territories. Meanwhile, Paddy Power Betfair’s new European integrated platform has significantly improved the customer experience while also boosting the number of cross-selling opportunities for its products, giving its sales outlook another shot in the arm.

A growth dividend great

City forecasts may be downgraded on the back of today’s fresh trading update, but at the time of writing, estimated growth of 6% and 7% for 2018 and 2019 respectively was pencilled in.

As a result dividends are expected to keep driving higher at a terrific rate too. The firm — which in 2017 hiked the full-year payout 21% year-on-year to 200p per share — is expected to raise the reward again, to 211p this year and to 226p in the following period.

These forecasts yield a plump 3.1% and 3.3% respectively, but this is not the only reason for income chasers to rejoice. Indeed, anticipated dividends for 2018 and 2019 are covered 2 times by projected earnings, bang on the accepted safety marker and meaning that share pickers can take confidence in these estimates being met.

In more positive news today, Paddy Power Betfair announced plans to return £500m of cash to shareholders over the next 12 to 18 months, most likely in the form of share buybacks and starting with £200m in the near future. This comes as no surprise given that the Footsie company is something of a cash machine (net cash leapt to £330m as of March from £244m just three months earlier), and should give dividend chasers extra peace of mind.

A slightly-elevated forward P/E ratio of 16.3 times is a small price to latch onto the Dublin firm’s impressive long-term growth prospects, in my opinion.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. 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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