A progressive dividend stock I’d buy after 10% share price fall

A test of a good dividend is how it holds up during earnings weakness. I think these two stocks pass the test.

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When I’m looking for dividend stocks, big yields are nice. But what I like better is a progressive dividend that’s well covered by earnings.

That’s what Vitec Group (LSE: VTC) offers, and its yield just got slightly better after the shares fell 12% on the back of a profit warning. That’s pushed the dividend yield up to 3.9% if it’s maintained at the forecast 39.5p per share.

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Earnings forecasts put cover at 2.2 times, so the almost certain earnings per share downgrade to come won’t necessarily hurt the dividend.

The company, which makes photographic and video equipment, including tripods, filters, and lights, was hit by a fire at its SmallHD division in 2018, and recovery has been slower than expected. On top of that, “retail de-stocking in Imaging Solutions has been unusually severe,” and that’s hit revenue.

Downgrade

Adjusted pre-tax profit for the year is now expected to be in the range of £47m to £50m, which is down from the £53m analyst consensus. If EPS falls by a similar level, it would still cover the predicted dividend more than twice, so I don’t see any need for panic right now.

Net debt does concern me a little, though, standing at £108.4m at the halfway point at 30 June, though a portion of that was due to a £21.6m impact from IFRS 16 lease accounting. We’ll have to wait to see how debt pans out in the longer term.

Chief executive Stephen Bird says he expects “2020 to be a year of progress for the Group, benefitting from the Summer Olympics, US Presidential elections, and the targeted growth initiatives already underway,” even if the aftermath of the fire will still have an impact.

Vitec’s current weakness looks to me to be down to one-offs, and I think we’re looking at good long-term income buy.

Price weakness

Shares in Playtech (LSE: PTEC) have been sliding since it warned us on 22 November that it was going fall short of analyst expectations, and the negativity continued Thursday with a further 6% drop. Playtech shares are now down 55% over the past two years.

The gaming software provider’s spread-betting division, TradeTech, hit “highly challenging” trading conditions in September and October, and the company now reckons overall EBITDA will come in “a little below current consensus,” with TradeTech’s results specifically set to come in “well below management’s expectations.”

Crackdown

Spread betting is not a good business to be in these days, I think, with financial regulators increasingly scrutinising all manner of financial derivatives and betting offerings. The European Securities and Markets Authority, in particular, has been cracking down on such products.

 Playtech says it is “evaluating all options for the business.” So it sounds like TradeTech could be offloaded, which doesn’t sound like a bad plan to me. A renewed focus on its gaming software would, I think, put the company more into the ‘picks and shovels’ field, and I reckon that could provide better core strength.

The 4.3% dividend yield forecast for this year would be more than 2.5 times covered by the existing consensus, so it’s another that I think should be resilient in the face of likely downgrades. I see Playtech as another tempting income buy.

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