Two FTSE 250 dividend growth stocks I’d sell straight away

These two FTSE 250 (INDEXFTSE: MCX) shares appear to be overvalued despite their strong dividend growth prospects.

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With the FTSE 250 and FTSE 100 having delivered strong gains in recent years, it is perhaps unsurprising that some of their incumbents appear to be overvalued. After all, investor sentiment has improved significantly, and this can cause valuations to become excessive.

With that in mind, here are two FTSE 250 shares which appear to offer narrow margins of safety. While they may be able to offer strong dividend growth potential due to improving financial outlooks, their investment appeal seems to be lacking.

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Positive outlook

Reporting on Thursday was services provider to the marine, oil & gas, and nuclear industries James Fisher (LSE: FSJ). The company’s trading in the current financial year has been in line with expectations. Its Marine Support, Specialist Technical and Tankships segments have traded well, with signs of recovery being shown in Offshore Oil. Contract wins have been relatively high in the first four months of the year, and the business remains confident regarding its outlook for the full year.

Looking ahead, the company is expected to report a rise in its bottom line of 6% in the current year, followed by further growth of 3% next year. As such, its growth outlook is relatively modest and yet it trades on a high rating. For example, it has a price-to-earnings growth (PEG) ratio of 3.8, which suggests that it could be overvalued at the present time.

Certainly, James Fisher is expected to raise dividends per share by 20% over the next two years. However, with its dividend yield being around 2% and it lacking a wide margin of safety, it appears to be a stock to avoid at the present time.

Mixed future

Also seemingly overpriced is price comparison website operator Moneysupermarket (LSE: MONY). The company has an excellent track record of growth, with it increasing its bottom line in each of the last five years. During that time its earnings have risen at an annualised rate of over 13%, which suggests that it has been able to find a sound strategy.

However, the prospects for the business appear to be somewhat less impressive. In the current year it is due to report a fall in earnings of 1%, followed by a return to growth of 8%. While the latter figure may be relatively appealing, the company’s valuation suggests that investors may be anticipating a higher figure. It trades on a PEG ratio of 2.2, which indicates that it may lack upside potential.

While Moneysupermarket is expected to record a rise in dividends per share of 11% over the next two years and has a dividend yield of 3.5%, its valuation makes it relatively unattractive. While the FTSE 250 may be trading at a high level versus its historic performance, there could be stronger investment opportunities available elsewhere within the index.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended 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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