An overlooked ex-FTSE 100 dividend stock I’d buy and hold forever

Roland Head explains why he’d buy this former FTSE 100 (INDEXFTSE: UKX) stock, despite its recent demotion to the FTSE 250.

| 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.

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.

Motoring ahead

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.

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 considered so you should consider taking independent financial advice.

Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, GlaxoSmithKline, Hikma Pharmaceuticals, and Motorpoint. 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

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in the FTSE 100 – or try to beat it?

Our writer has the option of investing in a FTSE 100 tracker fund. So why does he choose to buy…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£1,500 to invest in a Stocks and Shares ISA? Here’s how I’d do it

Our writer has been investing in his Stocks and Shares ISA. Here he details how he could put £1,500 in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

2 top FTSE 100 shares I’d buy before the market rebounds!

Christopher Ruane identifies a pair of FTSE 100 shares that have both tumbled in the past year and that he…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Here’s why the next bull market may have already begun

The UK stock market has taken the Bank of England's interest rate hike in its stride and green shoots suggest…

Read more »

Gold medal
Investing Articles

No contest! Here’s my stock of the week

An update from this company offered some relief from the economic gloom. It's this Fool's stock of the week.

Read more »

Cogs turning against each other
Investing Articles

Scottish Mortgage shares are back on the rise: is now the time to jump onboard?

Scottish Mortgage shares have risen over 25% in the past 30 days. This Fool takes a look at why and…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Why do Lloyds shares seem so cheap?

Lloyds shares have been losing ground and now look cheap on some valuations. So why has our writer removed the…

Read more »

Investing Articles

How to invest in shares to help beat inflation

Soaring prices could well outstrip our investing returns this year. I think it's more important to find shares to beat…

Read more »