Finding high-quality dividend stocks that offer both an attractive level of income and the potential for capital gains isn’t easy.
However, I believe I’ve stumbled across two companies that both offer this unique mix. Below, I’m going to weigh up the pros and cons of investing in these hidden growth and income champions.
Out of favour
At the beginning of July, shares in gambling software developer Playtech (LSE: PTEC) crashed by nearly a third after it issued its second profit warning in two years.
Management pointed to an “increasingly competitive backdrop” in Asia, which is expected to have a “significant impact on revenue throughout the rest of the year.“
Following the dour trading update, the City has been quick to downgrade its forecasts for the company’s growth in 2018. Before the warning, analysts had been forecasting EPS of €0.76 for the full year. Now a lower €0.67 is being targeted.
Looking at these numbers, I believe the market has overreacted to Playtech’s woes. After sliding 33% in the days after its profit warning, shares in the company now trade at a multiple of just 8.3 times forward earnings.
The valuation is even more compelling after discounting cash. According to its most recent numbers, Playtech has €107m of net cash, and that’s excluding €222m the firm made from selling its stake in online gambling group GVC in June.
Combined, I estimate these two cash balances are worth 83p per share. Using this figure, my calculations suggest shares in Playtech are currently trading at a cash-adjusted forward P/E of 7.2. On top of this highly attractive valuation, the shares also support a dividend yield of 6.8%. With more than €300m of cash to play with, it does not look as if this distribution will come under threat any time soon.
Beating expectations
So, after considering all of the above, I believe Playtech could be a fantastic income and growth investment.
Right now, it looks as if the market has written off the business. If Playtech can prove the market wrong, and sales start to recover, I believe the stock could easily outperform the broader market.
Playtech’s smaller peer Sportech (LSE: SPO) is another growth play I believe you should consider for your portfolio.
What excites me about Sportech is its future potential. The tech business has struggled to grow over the past few years, but the recent opening up of the US as what could be one of the world’s largest sports betting markets gives the company tremendous scope to grow over the next decade.
Soon after the US Supreme Court decision that effectively allowed sports betting across the country in May, Sportech signed an agreement with Sportradar (a $2.4bn company) for sports betting data, trading and risk management services.
It has only been a few months since the Supreme Court ruling, and City analysts have not yet come out with updated growth forecasts for Sportech. And until we have solid numbers on the size and growth of the market, it’s unlikely reliable predictions will be published.
Still, estimates suggest $150bn is already spent every year betting on sports across the country. Even if Sportech can grab just a tiny section of this market, the company and its shareholders should be well rewarded. This is why it’s worth keeping an eye on it in my opinion.
