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This dividend stock has beaten the FTSE 100 by 30% in three months. Should you keep buying?

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Every investor wants to beat the market. But in my experience, the best opportunities aren’t always where you expect to find them.

One potential example is retirement home builder McCarthy & Stone (LSE: MCS). Shares in this former FTSE 250 firm rose by 7% in early trade on Tuesday, after the company published details of its turnaround plan. McCarthy & Stone’s share price has now risen by 30% from the sub-100p low seen in late June, during a period when the FTSE 100 has been flat.

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What’s the plan?

Today’s “business transformation strategy” has been developed by John Tonkiss. The group’s former chief operating officer has been appointed as its new chief executive and will take charge of delivering the changes required to reverse the decline in group profits.

Mr Tonkiss plans to scale back the firm’s growth ambitions and focus on maximising profit margins and return on capital employed (ROCE). He’s targeting operating margins and a ROCE of more than 15% by the end of the 2021 financial year.

For comparison, the group’s ROCE was 10% over the 12 months to 28 February. Underlying operating margin over this period was 13%.

To help achieve these goals, cost savings of more than £40m per year will be made over the period. The group also plans to reduce the amount of capital employed in the business by at least £70m over the next three years.

Alongside this, McCarthy & Stone plans to broaden its assisted living services and allow prospective residents to choose whether to rent or buy their properties.

This last change is aimed at breaking the link between the wider housing cycle and the firm’s growth. If residents can rent instead of buying, they’ll no longer need to own or sell their own homes to be able to buy a McCarthy property.

My view

These changes are all fairly logical and could work. The group seems likely to become an operator of retirement communities, rather than just a builder.

Looking ahead, this stock trades at a 10% discount to book value and on a forecast P/E of 13. Last year’s dividend of 4.3p per share will be held this year, giving the stock a prospective yield of 3.3%.

In my view, now could be a good time to buy into this turnaround story.

Printing cash

Another turnaround stock with interesting prospects is banknote and passport printer De La Rue (LSE: DLAR).

This company lost a high-profile contract to print UK passports earlier this year, but says that an increased focus on technology and modern polymer bank notes could help generate long-term growth.

Last year saw the company sell its paper banknote business for £60m. This cash paid down debt and enabled the company to enact that focus on polymer banknotes, where sales volumes doubled to 810 tonnes last year. The group now supplies 24 issuing authorities, representing “more than half” the world’s total polymer note issuers.

A long-term buy?

Analysts’ forecasts suggest that adjusted earnings will be flat this year and return to growth in the 2019/20 financial year. The stock trades on 11 times forecast earnings and offers a 5.2% yield that was covered by free cash flow last year.

Noted activist investor Crystal Amber Fund has taken a 5% stake and is agitating for change. I think the shares could be a good long-term buy at this level.

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Roland Head has no position in any of the shares 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.

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