A FTSE 100 dividend growth stock I’d buy today and one top performer I’d consider selling

Why I’d recycle my profits from this small-cap into this evergreen FTSE 100 (INDEXFTSE: UKX) big-cap.

| More on:

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.

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.

Investors have enjoyed a terrific ride since antibody supplier Bioventix (LSE: BVXP) arrived on the FTSE AIM market in April 2014. I first wrote about the firm that October when the share price was 680p, the forward price-to-earnings (P/E) ratio was 16, and the forward dividend yield was 3.9%. Back then, I thought the valuation looked modest “for such a fast-growing business.”

Strong performance

Fast-forward four years to today and the valuation no longer looks modest. The current share price of around 3,000p puts the forward P/E ratio at 30 and the forward dividend yield at 2.4%. I think this outcome is a good example of how a valuation re-rating can really turbocharge investor returns when a good growth story becomes accepted by the investing community.

Of course, Bioventix has earned its re-rating. Over four years, revenue is up over 125%, earnings are more than 200% higher, and the normal dividend is almost 100% higher. Throughout the period, the firm’s quality indicators have been mind-bogglingly good, and the whole set-up screams ‘special’, so I can see why many investors have clung tightly to their shares. However, there’s no denying that the now-racy valuation raises the stakes.

Meanwhile, Bioventix keeps pumping out good figures. Today’s full-year results reveal revenue up almost 21% compared to the equivalent period last year, and pre-tax profit lifting 19%.

The firm’s debt-free balance sheet is a joy to behold and the cash pile rose by £0.8m to £7m. The money is more than the directors need to finance further growth, so they declared a special dividend of 55p per share, to be paid on top of a second interim dividend of 36p, itself up 16% on last year.

The company remains a quality outfit but forward earnings growth expectations are now the item that’s ‘modest”, cooling from the robust double-digit advances we’ve been seeing from the firm. If I still held shares in Bioventix I’d cash in my chips now to nail down my gains because I think the shares could drift lower as operational progress catches up with the valuation.

A decent long-term bet?

Instead of Bioventix, I’m tempted by FTSE 100 medical technology company Smith & Nephew (LSE: SN), which supplies joint replacements for knees, hips and shoulders; tools for minimally invasive surgery; advanced wound dressings; plus nuts, bolts, plates and other items for trauma surgery – all good stuff with apparent evergreen demand in today’s world.

The firm’s progress with revenue, profits and cash flow has been steady, albeit unspectacular, over the past few, which reflects in a keener valuation than we are seeing with Bioventix. At today’s share price close to 1,340p, the forward P/E ratio for 2019 sits at just over 17, and the forward dividend yield is a little over 2.1%. For that price, I see Smith & Nephew as equally exposed to the benefits of potential upside surprises as it is to downside risks, which is a fair proposition. I’d be happy to tuck some of the shares away for the long term.  

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.

Kevin Godbold 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.

More on Investing Articles

Investing Articles

Here’s why I think the Vodafone share price should be 110% higher

Reflecting on speculation, our writer believes there’s a case to be made for the Vodafone share price being more than…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Is this dividend star also the best bargain in the FTSE 100?

This FTSE 100 stock pays a whopping 8%+ yield, looks very undervalued against its peers, and is set for stellar…

Read more »

Investing Articles

2 FTSE 100 stocks. One sublime, the other ridiculous

Our writer doesn’t understand the appeal of Ocado. But looking at the grocer’s latest results makes him see the attraction…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Down 18% in a year, what’s next for the Greatland Gold (GGP) share price?

The Greatland Gold share price has disappointed over the past 12 months. Our writer asks whether the company’s latest update…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

With 30% annual returns for a decade, I’m buying this for my Stocks & Shares ISA

Oliver Rodzianko has been looking for a new investment for his Stocks and Shares ISA. Here's one he's decided is…

Read more »

Investing Articles

These were the FTSE 100’s dogs and stars in February

The FTSE 100 limped along last month, but some Footsie shares soared while others slumped. Here are February's winners and…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

This £43bn of passive income is up for grabs today!

As a lover of passive income, I'm always on the lookout for extra cash. The good news is that these…

Read more »

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

Is this my once-in-a-decade chance to buy these 2 beaten-down UK shares before they rocket?

The FTSE 100 has had a bumpy ride but these two UK shares have had it bumpier. Could now be…

Read more »