This 6% dividend stock could smash the FTSE 100 this year

Roland Head highlights a FTSE 100 (INDEXFTSE:UKX) stock he’d buy and a rampant outsider that could be worth a look.

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A person holding onto a fan of twenty pound notes

Image source: Getty Images.

The Plus500 (LSE: PLUS) share price rose by 6% when markets finally opened on Thursday, after the online CFD trading firm upgraded its profit forecasts for the year.

The company’s shares have now doubled this year, making it one of the top performers on the UK market. As I’ll explain, I think there could still be more to come.

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Rapid growth

Plus500’s board says that expectations for 2018 have “materially increased”, after a strong start to the year. High levels of trading in cryptocurrencies such as bitcoin and ethereum helped to boost profits, along with a period of “relative volatility” in the stock market.

The firm’s shares have now risen by more than 1,300% since its IPO five years ago. Annual profit has risen from $17m to $200m over the same period. It would be easy to view this as a bubble waiting to collapse, but so far there’s no sign of this. Rapid profit growth has been matched by strong free cash flow, much of which has been returned to shareholders through generous dividends.

Still cheap today?

Today’s trading update did contain some words of caution. On 1 August, new regulatory rules to limit the amount of leverage — or borrowing — available to retail investors will come into force. These changes are expected to have some impact on profit for CFD firms, but the scale of the impact isn’t yet clear. Plus500’s management said today that the impact was “difficult to assess” until the changes are fully operational.

Before today, analysts were forecasting profit growth of about 23% to $244m in 2018. These forecasts look likely to be revised upwards after today’s news. I suspect earnings estimates will rise by about 10%. This would put the shares on a forecast P/E of 9.5, with a prospective yield of about 6%.

That doesn’t seem expensive to me, even if regulatory changes leave profits flat in 2019. And the share price could find further support when the company moves from AIM to the London Main Market later in June. Potential inclusion in the FTSE 250 would mean that many index tracking funds would be required to buy the shares.

Plus500 isn’t without risk. But it’s consistently beaten expectations over the last few years. Based on what we know today, I’d continue to rate the shares as a buy.

Another double bagger that could keep rising

Online sports-betting and gaming company Paddy Power Betfair (LSE: PPB) is another stock that’s profited from the public’s appetite for online betting.

The group operates in the UK, Ireland, Australia, some European countries and the US. Its shares have risen by 125% over the last four years, propelling this business into the FTSE 100. In 2016 the group acquired rival Betfair, which doubled its revenues. However, this deal required some digestion and the shares have gone nowhere over the last year.

Happily, the group’s 2017 results suggest to me that the combined business is now firing on all cylinders. Underlying revenue rose by 13% to £1,745m last year, while underlying operating profit climbed 19% to £392m, giving an attractive operating margin of 22%. Underlying free cash flow rose by 57% to £395m, supporting a 21% dividend increase.

The right time to buy?

Paddy Power Betfair’s first-quarter update in May revealed a 12% fall in underlying operating profit for the period. This was blamed on “adverse sports results” in Australia and a “sustained period of bookmaker friendly sports results” in the UK, which drove away punters.

However, short-term headwinds such as these are common in this sector. They tend to even out over time. And these more difficult trading conditions didn’t prevent the group from ending the quarter with net cash of £330m.

This cash will be used to help fund a £500m share buyback over the next 12-18 months. Doing this should support earnings per share growth, which analysts expect to be about 6% this year.

Consensus forecasts put the stock on a forecast P/E of 20.9, with a prospective yield of 2.4%. This isn’t cheap, but the firm’s high margins suggest cash generation should remain strong. And the US market offers big opportunities for expansion, if sports betting is legalised as expected.

I’d rate this stock as a long-term buy for investors in this sector.

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