Have £1,000 to invest? A FTSE 250 dividend stock that I’d buy and hold for the next two decades

This FTSE 250 (INDEXFTSE: MCX) income and growth champion could be the perfect stock to boost your portfolio’s performance.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In my opinion, companies that provide a specialist, bespoke service are some of the best investments you can make for the long term. Firms like Sanne (LSE: SNN) for example, which is a specialist global provider of corporate and fund administration services.

Administration services are tedious and time-consuming, but they are also extremely complex and companies can’t afford to get them wrong. With this being the case, I understand it is often more cost effective for businesses to outsource these functions, rather than build their own in-house teams.

Growth charging ahead 

You only need to take a look at Sanne’s historical figures to see just how big this market for outsourced administration is becoming. From just £19m in sales in 2012, the company reported total sales of £113m in 2017.

The City doesn’t expect growth to slow down any time soon. Analysts have already pencilled in potential revenues of £157m for 2019. Alongside its first-half results release, published this morning, the firm confirmed today that it is currently on track to hit full-year growth forecasts. For the six months to the end of June, revenues grew 17%, although due to “an atypical first half weighting of results in 2017,” profit before tax declined 12% year-on-year on a constant currency basis.

And as well as the bespoke and specialist nature of the firm’s business, what I also like about Sanne is its relatively small size and cash generation. For the first half of 2018 for example, it booked an underlying operating profit margin of 30%. 

These figures indicate to me that the company has plenty of capital to reinvest back into the business and expand into new markets. Bolt-on acquisitions in Madrid, Mauritius and Luxembourg show that this is exactly what management is doing.

As Sanne continues to build on its position in the market for administration services, I would be happy to hold the stock for the next two decades. Currently trading at a forward P/E of 21, the shares don’t come cheap, but I believe it is worth paying a premium to take part in Sanne’s growth story.

Bolt-on growth 

Diploma (LSE: DPLM) is a business that I believe has similar qualities. The company produces specialised technical products for industries such as life sciences. This is not the sort of market where any old business can come and quickly grab market share, Diploma has spent decades building its reputation. And like Sanne, the firm is using its cash flow to acquire smaller businesses to help boost growth. 

The latest acquisition was FS Cables, for a total cash consideration of £18m.

A combination of organic growth from its existing ops, as well as complementary growth from acquisitions, has helped turbocharge Diploma’s earnings expansion over the past five years. It doesn’t look as if experts believe this will change any time soon. 

The City is expecting earnings to expand 26% in 2018, leaving the stock trading at a forward P/E multiple of 25. That’s a bit on the expensive side, but once again I believe this specialist business with enormous growth potential is worth a premium valuation. Over the past six years, earnings growth has averaged just under 10% per annum on a compound basis. 

If this continues, it won’t be long before Diploma grows into its valuation.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »