Here’s why I’d sell the Ocado share price and buy this FTSE 100 dividend stock for life

Ocado Group plc (LON:OCDO) is too pricy for this Fool. He’d rather invest his money in a leading FTSE 100 (INDEXFTSE:UKX) income stock.

| 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.

Over the past 12 months, the Ocado (LSE: OCDO) share price has surged 154.4% making it the best performing stock in the FTSE 100.

However, there’s still one vital component missing from the Ocado story, and that’s profit. The City is not expecting the firm to report a profit for the next two years, and while investors have celebrated the company’s progress in signing deals, the financial disclosure around these deals from management has been limited.

Cloudy outlook 

There’s no doubt that Ocado has a product that retailers want. The company has inked agreements with some of the biggest retailers in the world to help them build automated warehouses and fulfil customer orders, but signing contracts is one thing, generating cold hard cash is another. It could be years before investors see a return from these agreements. 

Ocado’s lack of profit generation is the main reason why I’d advise selling the shares after their recent run. Until the company starts earning, it’s going to be challenging to place a value on the stock, and it could be a bumpy ride from here to profitability. 

I prefer to invest in shares that are already generating a profit and have a track record of returning funds to shareholders, like InterContinental Hotels Group (LSE: IHG). 

Cash cow 

Owner of Holiday Inn and Kimpton hotels, IHG is in the middle of a growth spurt. At the beginning of the month, the firm announced that it had added 12,000 rooms to its portfolio in the three months to March and had another 24,000 in the pipeline. The firm is mainly focused on growth in Asia. IHG opened 18 hotels and signed another 52 in Greater China during the first quarter, a record rate of signings for the company. 

To complement the growth of its existing brands, IHG bought Six Senses, a group of luxury resorts in February for $300m. Management is planning to add an additional 60 sites to this brand over the next decade, funded with $125m of annual savings from the rest of the business. 

Earnings expansion 

IHG’s growth focus will lead to a 12% increase in earnings per share in 2019 according to City analysts, followed by growth of 8.3% in 2020. This growth will, according to analysts’ estimates, allow for a 15.2% dividend increase in 2019 and 9% in 2020. While this growth will only give a yield of 2.4% for 2019, I should point out that IHG has a history of returning any extra cash to shareholders with special dividends.

As I pointed out the last time I covered IHG, the firm has issued 799p in special dividends alone during the past three years. In 2018, special and regular dividends from the company amounted to 291.7p per share for a total yield of 6.1% (assuming investors acquired the stock at the beginning of 2018).

Compared to Ocado’s lack of profitability, I think it’s impossible to ignore these mouth-watering cash returns. That’s why I’d dump the Ocado share price and buy IHG instead today. 

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 recommended InterContinental Hotels Group. 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

A 25-year-old investing £100 a month in a Stocks and Shares ISA could have this much at 50…

Opening a Stocks and Shares ISA at a young age can be a masterstroke when it comes to building long-term…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Here’s why this FTSE 100 gem still looks a huge bargain to me despite a 94% rise this year

A stock can still have huge value even after a substantial rise in price. To find out if this is…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

Investing £3.33 into an ISA every day from 22 could result in a £60,000 passive income

Millions of Britons use the Stocks and Shares ISA as a way to build wealth and generate an income. However,…

Read more »

Investing Articles

2 resurgent cheap shares that could skyrocket in 2025

Cheap shares can take our portfolios to the next level. Here, Dr James Fox highlights two stocks that appear to…

Read more »

Investing Articles

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »