Have £2,000 to invest? Here are two FTSE 250 dividend stocks I’d buy today

Roland Head suggests two FTSE 250 (INDEXFTSE:MCX) income picks for long-term investors.

| 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.

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.

Today, I want to look at two FTSE 250 dividend stocks that I believe have the potential to provide an attractive long-term income.

My first company could be a controversial choice. Engineering group Babcock International Group (LSE: BAB) has come under attack from short sellers recently. The company disputes most of these allegations, but today’s half-year results have left the shares down by 5%, at the time of writing.

Good and bad news

Investors fear that Babcock will turn out to be another outsourcer with loss-making contracts, shrinking profit margins, and too much debt. In my view, today’s figures justify some of these concerns, but certainly not all of them.

The good news was that the group’s underlying results were in line with expectations. Exiting low-margin businesses helped to lift underlying operating profit rose by 1.4% to £279.6m, even though revenue fell by 2.3% to £2.577bn.

A significant improvement in free cash flow provided the cash needed to reduce net debt by £159m, to £1.132bn. This reduced the group’s net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) multiple from 1.9x to 1.6x.

Looking ahead, the group’s combined order book and pipeline expanded by 3% to £32bn, including £650m of new orders from the Ministry of Defence.

Unfortunately, today’s figures also included some bad news. The firm’s contract to decommission Magnox nuclear reactor sites ends next year. Management now expect revenue to fall by about £250m, more than double previous guidance of £100m. The loss of the contract is expected to wipe £20m off the group’s operating profits.

Guidance unchanged

Chief executive Archie Bethel says that the outlook for the 2018/19 financial year is unchanged. He’s expecting single-digit revenue growth and improved profit margins.

Broker forecasts put the shares on a 2018 forecast price/earnings ratio of 6.6, with a dividend yield of 5.2%. If the outlook remains stable, I believe these shares could be an income buy.

A safer option?

If you’re concerned about the outlook for Babcock, one alternative I’d consider is FTSE 250 engineer QinetiQ Group (LSE: QQ). This business is focused on developing its own products and technology, which should give it a stronger competitive edge.

QinetiQ’s business mainly operates in the defence and aerospace sectors. Historically, it’s worked mostly for the UK Ministry of Defence, but this is changing. International customers accounted for 31% of revenue during the first half of the year, up from 26% during the same period last year.

One reason for this changing strategy is that profit margins on UK government contracts are falling. As a result, analysts are forecasting a 10% fall in underlying earnings per share this year, with a modest return to growth in 2019/20.

The group’s half-year results supported this view. Underlying operating profit fell by 11% to £51.1m, despite sales rising 7% to £420.3m.

Falling profit margins aren’t ideal. But I believe the firm should be able to continue winning attractive new work. In the meantime, a net cash balance of £250m means that management has money available to invest in new opportunities.

QinetiQ shares have risen by 15% so far this year. This has left the stock trading on a forward price/earnings ratio of 15.5, with a 2.4% dividend yield. This isn’t cheap, but I think the long-term potential of this business means the price is fair.

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.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »