Have £2k to invest? One FTSE 250 dividend stock I’d buy, and one I’d avoid

Buying bargain shares isn’t always easy. So today I’m going to look at two companies which are both in the middle stages of a recovery.

I think both firms are doing well, but there’s only one that I’d consider buying for my own portfolio. Let me explain why.

I’m impressed by these numbers

Balfour Beatty (LSE: BBY) is a name you’re probably familiar with. The company is involved in large construction projects all over the UK. Shareholders may also remember how the firm’s share price halved in 2014 when the business ran into financial problems.

That’s all in the past now. Under turnaround boss Leo Quinn, the group has dealt with problem contracts, repaid a lot of its debt, and is now winning new work on much better terms. On Friday, Quinn said that he expected the firm to achieve its goal of “industry standard” profit margins for the second half of 2018.

Balfour’s profit margins and cash generation have certainly improved. Average monthly net cash is expected to be £185m this year, ahead of previous forecasts. And the group’s underlying operating margin was 2.7% over the 12 months to 30 June, compared to 2% during calendar 2017.

Buy or avoid?

I’m impressed by Balfour Beatty’s transformation. But I think it’s worth remembering that profit margins in the construction industry are fairly low, even at the best of times.

I’m not convinced this is the best of times. In recent weeks, several UK-listed construction firms have said that banks are restricting new lending to this sector. That’s a bearish sign for the construction industry, in my view.

Balfour shares are trading on about 13 times 2018 forecast profits, at the time of writing. Although earnings are expected to rise by about 15% next year, I think the stock looks fully priced at the moment. I won’t be buying Balfour Beatty for my portfolio.

Powering up for growth

One industrial firm I would like to own is temporary power provider Aggreko (LSE: AGK). Like Balfour Beatty, this firm went through a difficult patch a few years ago. The Aggreko share price has yet to recover and remains nearly 60% lower than it was five years ago.

However, I think the outlook is starting to improve. The firm said today it had won a $200m contract to provide power at the 2020 Tokyo Olympic Games. This represents about 11% of annual revenue, based on recent results, so it’s a pretty valuable win.

Getting more profitable

Chief executive Chris Weston expects that the Olympics deal will help Aggreko to meet its target of generating a “mid-teens” return on capital employed by 2020. This measure of profitability compares profits with cash invested in the business, so it’s a useful guide for an equipment hire company.

My calculations show that the firm’s ROCE over the last 12 months was 11%, excluding certain one-off costs. That’s a solid figure, but if Weston can improve it further then I think earnings could rise significantly.

Aggreko shares currently trade on a forecast P/E of 14.4, with a dividend yield of 3.8%. I believe the group’s improving profitability and global footprint could make this a good level to buy. I’ve added the shares to my own watch list.