Finding stocks you can safely plan to hold forever isn’t easy. But in my view, there are a number of attractive opportunities for long-term investors in today’s market.
In this article I’m going to look at a stock that’s just fallen out of the FTSE 100 and rejoined the FTSE 250 mid-cap index. I think this well-established company has the potential to get much bigger. I’m also going to consider a small company that’s impressed me with its profitability and growth, but could suffer during a UK recession. Is now the right time to buy?
A dividend growth star?
The share price of FTSE 250 firm Hikma Pharmaceuticals (LSE: HIK) has risen by more than 250% over the last 10 years. Although the firm is currently going through a period of slower growth, I believe this business enjoys strong fundamentals that should make it an attractive long-term investment.
Hikma’s specialism is generic medicines. These are cheaper alternatives to branded products whose patent protection has expired. The market for generics is very large and important, as many treatments remain essentially unchanged for decades.
Making such medicines available more cheaply is attractive to large purchasers such as the NHS. It also helps to open up new sales opportunities in emerging markets. This is a key area of strength for Hikma, which operates in the Middle East and North Africa, as well as the US and Europe.
I’m attracted to Hikma’s strong record of cash generation and low debt levels. In contrast to larger rivals AstraZeneca and GlaxoSmithKline, Hikma’s dividend is covered more than three times by earnings and looks very safe to me.
Indeed, since the firm’s first dividend payment in 2006, the payout has been held or increased every year. Last year’s payout of $0.38 per share was a 1,700% increase on the firm’s maiden dividend in 2006.
The shares have fallen back a little this year. They now trade on about 14 times forecast earnings, with a 1.9% dividend yield. I believe this could be a good entry point for long-term investors.
Another overlooked dividend growth stock I’m keen on is used car supermarket chain Motorpoint Group (LSE: MOTR). This firm is the UK’s largest independent used car specialist, with a network of 12 car supermarkets. Motorpoint only sells cars under three years old and with less than 25,000 miles on the clock.
I’ve been impressed by Motorpoint’s performance since its flotation in 2016. Customers seem to like it too — 30% of sales are to repeat customers.
Although growth slowed last year, sales topped £1bn for the first time and adjusted pre-tax profit rose by 10% to £22.9m. Cash generation remains excellent, thanks to the group’s low costs and financial discipline.
In my view, this is a very well-run and focused business. The main risk I can see is that profits are very sensitive to small changes in sales. When sales are rising, this is good news. But my sums suggest that a 5% fall in sales could cause operating profit to fall by as much as 15%.
Trading on 11 times forecast earnings and with a 3.5% yield, the shares don’t look expensive. But I’d only consider buying this stock if you’re confident about the outlook for the UK economy. Personally, I’d rate Motorpoint as a hold for now.