There’s good reason to be confident that it can. Last year, group revenue increased a whopping 97% to £579m, due to strong 29% constant currency sales growth from the core Boohoo brand and full acquisition of the US brand PrettyLittleThing.

But with this level of growth now routine in the eyes of investors, there’s a significant amount of future expansion already baked into the group’s valuation of 47 times forward earnings. So this means there’s going to need to be unexpected positive catalysts to see Boohoo’s share price double again in the short term.

One possible avenue for this is an unexpected uptick in sales from management’s current guidance of 35-40% sales growth. This is possible, but would require either overseas growth to jump substantially from the 65%+ growth posted last year or for new brands to prove immensely popular.

Or, if recent big investments in the physical infrastructure that underpins future sales growth come in cheaper, or more efficient than expected, investors would likely react favourably as adjusted EBITDA margins would reverse the dip they took from 12.1% in FY17 to 9.8% in FY18.

Management has already set relatively low expectations for full-year EBITDA margins of 9-10% this year. So even a marginal uptick in profitability, without being seen to sacrifice much-needed investments, would offer upside potential.

Boohoo has certainly gone from strength to strength in recent years and proved the bears such as myself wrong. However, with the online fast fashion sector offering low barriers to entry for competitors, relatively low margins, and the constant potential for young consumers to shift allegiance to another brand, Boohoo is still one richly-valued stock I’m steering clear of.

A more down-to-earth investment 

I’m much more interested in thread supplier Coats (LSE: COA), whose share price has returned 143% over the past five years – not far behind Boohoo’s 172% return over the same timeframe. On one hand, Coats suffers from some of the same problems I have with Boohoo. After all, for clothing makers, thread is just another input where cost is normally the primary concern.

But Coats has turned itself into more than just a low margin, bulk thread supplier in recent years. It now produces a growing percentage of sales from higher value-added threads made from a variety of materials for end uses ranging from fire-proof clothing to telecommunications cables. And now management has set its sights on a potentially transformative market, namely composite threads that use materials like carbon fibre to make stronger, lighter products for use in automotive or industrial settings.

Interim results covering the six months to June suggest the company will stay in investors’ good graces as constant currency sales bumped up 5% to $788m, while adjusted operating margins increased from 12% to 12.7%. With plenty of opportunities to further boost profitability, market share gains are expected to build, and with huge end-markets to tap, I reckon Coats could turn into a very nice long-term holding. And, at under 14 times forward earnings, while kicking off a growing 1.35% dividend yield, I find it attractively-priced to boot. 

The post What would it take for the Boohoo share price to double again? appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income
• What sort of passive income stream could you build for a fiver a day?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo 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.

A sea change in opinion

One is online grocer Ocado (LSE: OCDO), whose share price has risen 130% in the past five years… and over 200% in just the past 12 months. The key to this rapid share price run-up is the long-term potential from the proprietary systems the group has developed to run highly-automated grocery delivery logistics facilities.

Understandably, investors are more enamoured with this part of the business that involves patent-protected technology, the potential for high profitability, and ability to sell anywhere in the world than the cost-sensitive, low-margin online grocery delivery business that it’s still best known for in the UK.

That said, the future for Ocado from here is unlikely to be all sunshine and butterflies. The company’s market cap has rocketed to £6.1bn, while analysts are expecting losses for each of the next two years as management builds out the delivery warehouses for international partners. As operations are still loss-making, this means investors could be tapped for funds once again, as they have been twice over the past year.

Also, with its valuation built almost entirely on its long-term potential, there could be significant share price volatility over the next few years if any international contracts are cancelled, delayed, or end up being too expensive.

Ocado is in a better position than it has been in years as long-promised international agreements are being signed, one after the other. But with a sky-high valuation, recent share sales by insiders, and little information on the particulars of its distribution agreements, I’m happy to sit on the sideline for the time being.

A Middle East money spinner 

An even more impressive performer than Ocado has been Middle East healthcare firm NMC Health (LSE: NMC), whose share price has risen nearly ten-fold in just the past five years. That’s thanks to soaring demand for its healthcare facilities across the Emirates and Saudi Arabia, plus a series of acquisitions that have added to its clinic numbers and expanded its offerings into everything from IVF treatment to home nursing.

In the half year to June, the group’s revenue rose 20.2% to $932m, while higher occupancy rates at its hospitals and acquisition synergies boosted EBITDA by 32.1% to $225.5m. A recently-announced joint venture to bulk up the group’s offerings in Saudi Arabia should also provide significant growth potential over the medium term as healthcare spending in the Kingdom is relatively low compared to Western nations. But it’s rising fast as incomes increase and rates of chronic disease rise.

Looking forward, the group still has considerable potential to grow by increasing occupancy rates at its facilities, branching out into extra services, and expanding into neighbouring countries. While net debt of $1,152m at period-end is worryingly high, and its valuation of 32 times forward earnings is lofty, investors looking for a cash-generative business with long-term tailwinds at its back, plus plenty of expansion opportunities, may find NMC Health an interesting growth option to back for the long-term.

The post Tired of the FTSE 100’s low returns? Consider these large-caps that’ve doubled in just two years appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income
• What sort of passive income stream could you build for a fiver a day?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended NMC Health. 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.

However, as we saw in the immediate aftermath of the initial Brexit vote in 2016, not all stocks will be dinged equally, with the potential for companies with a high proportion of non-sterling sales to actually benefit.

New name, same successful business model 

I would certainly expect this to be the case for plumbing supplies distributor Ferguson (LSE: FERG). This is because the FTSE 100 constituent may be listed in the UK, but its business here is quite small. In the nine months to April, the UK accounted for less than 6% of profits due to the company’s focus on the massive US market. If the pound were to once again weaken dramatically against the dollar, we’d see a solid uplift in Ferguson’s share price.

And over the long-term, no matter how Brexit negotiations go, Ferguson has plenty going for it. First and foremost is its exposure to the US market, where sales in the first three quarters of the year increased 10.9% in constant currency terms to $12bn. A strong focus on cost management and improvements to operations from recurring bolt-on acquisitions meant margins grew also, sending US constant currency trading profits, which are essentially adjusted operating profits, up 17.5% to $0.9bn.

While its small UK business continues to struggle, this exposure to the US and fast-growing and more profitable operations in Canada and Central Europe offer plenty of potential for further organic and inorganic expansion. However, with the company valued at 18.6 times forward earnings I’ll be waiting for a dip in its share price before I’d consider buying into what is a highly cyclical business at heart.

A new constituent with staying power

Another FTSE 100 giant that would fare well following a no deal Brexit is safety products engineer Halma (LSE: HLMA). Last year, only 16% of group revenue came from the UK and this figure should fall over time as management focuses on faster growing regions outside of the US, UK and Europe.

Like Ferguson, there’s plenty to like about Halma aside from its high degree of non-sterling earnings. Last year was its 15th straight year of increased revenue and profits, which shows just how successful the company’s expansion strategy has been thanks to organic expansion into new markets and regions, recurring bolt-on acquisitions in new sectors, and investments in developing new products.

In the year to March, all of these long-term growth drivers came together to send group revenue up 12% to £1.1bn with pre-tax profits clocking in 10% higher at £0.2m. Looking ahead, I see no reason for this growth to stop any time soon as increasing regulation and population growth provide significant tailwinds.

Plus, with a highly profitable business model and period-end net debt of only £0.2bn, the company is in a great position to gain market share for many years to come. With a valuation of 29 times forward earnings, Halma is quite pricey, but for long-term investors and those worried about a hard Brexit, it could be a high-quality addition to many portfolios.

The post Think a no-deal Brexit is going to tank the market? These FTSE 100 stocks should survive just fine appeared first on The Motley Fool UK.

More reading

• 10 days to the next stock market crash?
• A stock market crash could be a gift for long-term investors

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma. 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.

This isn’t to say that Domino’s dispute with franchisees, who are worried that new stores are cannibalising sales at their existing outlets, means nothing.

However to date, Domino’s has delivered fantastic returns not only to shareholders but also to franchise owners who have seen sales skyrocket, thanks to wise investments in mobile technology and crafty marketing campaigns. Given this history of rewarding all major stakeholders, I remain confident Domino’s will work out how to fix its strained relationship with franchisees.

Furthermore, the underlying business continues to perform very well. In the first half of the year, revenue rose 22.6% to £259.1m thanks to 22 new store openings in the UK and strong domestic pre-split like-for-like sales growth of 5.9%. This impressive performance means I’m inclined to believe management’s long-term target for 1,600 UK and Ireland stores remains intact and is a viable goal.

It’s true that the group’s burgeoning international operations are a drag on current performance, with its stores in Switzerland and Scandinavia contributing a £1.8m operating loss in the period. That said, these operations offer significant long-term potential. In the half, they grew sales a whopping 116.4% year-on-year. And as these operations scale up, I’d expect them to begin contributing profits before too long.

So, Domino’s continues to grow at home and overseas despite recent hiccups. Add in the highly profitable franchise business model it runs, and a respectable 3.31% dividend yield, and I think the company’s current share price looks far too cheap for such a high-quality business.

A higher-risk, higher-reward option? 

The success of Domino’s Pizza plc hasn’t gone unnoticed by other international holders of the Domino’s brand, which has led the likes of DP Poland (LSE: DPP) to list on the LSE. This Domino’s group in Poland has suffered fits and starts over the years but half-year results released this morning suggest it may finally be on the right path.

During the six months to June, system-wide sales increased 38% to £7.7m in constant currency terms, thanks to five new store openings and a 15% uptick in like-for-like sales. Due to its small scale and investments in a new commissary to support new store openings, the group is loss-making to the tune of £1.1m in H1.

However, with great revenue growth and further franchisee interest, the potential for solid profitability is there. Plus, with £3.8m in net cash at period-end, the company has sufficient room to expand for a while yet before needing to tap debt markets or shareholders for further funds.

All of this makes DP Poland significantly riskier than Domino’s Pizza plc. But for investors with a high-risk tolerance who are seeking potentially very high returns, DP Poland is one to dig into deeper.  

The post Is supercharged growth stock Domino’s Pizza now simply too cheap to ignore? appeared first on The Motley Fool UK.

More reading

• Will it soon be too late to buy dirt cheap FTSE shares?
• This £20k ISA could deliver almost £1,500 passive income per year

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Domino's Pizza. 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.

Now, this was indeed a ‘special’ dividend representing part of the proceeds from the management buyout of another part of the business, but I do see good potential for the underlying business to continue paying more down-to-earth, but still impressive, dividends.

A big part of this is the high-margin, highly-scalable nature of the wealth management business. In the first half of this year, the business generated revenue of £385m and kicked off £110m in underlying operating profits as margins bumped up to 29%.    

In these same six months, the company attracted £2.2bn in net client fund inflows, which together with investment returns, took its assets under management up to £116.5bn. The fund management industry is a competitive one but with equity markets buoyant, trillions in potential inflows to target, and its own management team now able to focus solely on growing the business, rather than being part of a larger parent company, I expect Quilter has plenty of space to continue expanding.

And thanks to the inherent operational leverage in its business model, there’s also good scope for further improvements to margins. This would mean higher earnings, and thanks to the business’s low capital investment needs, much of these can be returned to shareholders.

In H1 the company’s 5.5p underlying earnings per share, which exclude the aforementioned disposal, increased 25% to 5.5p. For the full year, analysts are estimating EPS of 10.75p rising to 11.5p in 2019 with a dividend payment that year of around 5p.

At today’s share price that would mean a yield of 3.8%. Certainly not the 8.8% yield being generated this year, but to my eyes a very sustainable payout from a company worth following given its prospects for revenue and profit growth.

A picks and shovels option

Another player in the wealth management space that appeals to me is fund services provider JTC (LSE: JTC). Rather than managing money for clients like Quilter, it provides administration services for money managers ranging from private equity groups to ultra-high-net-worth individuals. The company has been public for only a few months, but thanks to increasing regulation, geographic expansion and acquisitions that have broadened the array of services it offers, it has a compelling track record with compound annual revenue growth of 23% over the decade to 2017.

Judging by the company’s interim results released this morning, this growth is far from done. Revenue during the six months to June rose 25.2% to £35.3m thanks to organic growth of 8% and two acquisitions completed last year. The integration of acquisitions and a focus on cost controls led EBITDA margins up from 23.6% to 29.9% during the period as well, meaning the business generated £10.5m in underlying EBITDA.

With an uptick in the value of its potential bidding pipeline and another acquisition completed following the end of June, this growth looks set to continue into H2 as well. At 24 times consensus forward earnings, JTC’s shares are not cheap. But with a strong record of growth, high levels of recurring revenue and less cyclicality than fund managers, I think this business is one to watch closely.

The post One 8%+ yielding growth stock I’m adding to my watchlist appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income
• What sort of passive income stream could you build for a fiver a day?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Thanks to selling everyday necessities, such as soap and shampoo via well-known brands like Carex, Imperial Leather and Original Source, Cussons’ defensive attributes are very sound. That should be of great comfort to nervous investors wondering when the next economic downturn will hit.

On top of relatively non-cyclical sales, the group also boasts potentially-transformative long-term growth prospects, thanks to its exposure to emerging markets, including Nigeria and Indonesia, that boast fast-growing populations and bumper prospects for economic growth. Although Nigeria is going through rough macroeconomic period right now, its consumers are still buying Cussons’ products in huge volumes and the company has done well to grow market share during this tough time.

So, while group-wide adjusted operating profit dropped 15.9% in constant currency terms last year to £85.7m, due to Nigerian weakness, I still see dramatic long-term potential from access to Africa’s largest economy with a fast-growing population that the UN reckons will make it the third largest country globally by 2050.

Elsewhere, highly profitable operations in the UK ran into headwinds last year as operating profits stayed flat but still did their part to ensure earnings per share came in at 11.41p per share, more than covering the 8.28p full-year dividend payout.

With management rolling out new products and refreshed marketing campaigns in the UK, I reckon Cussons’ profits should regain positive momentum soon. Coupled with long-term growth potential in emerging markets, a four-decade-long history of dividend hikes, and its defensive nature, this makes PZ Cussons one FTSE 250 stock I think investors should consider right now.

A dividend to milk for all its worth 

Another mid-cap dividend dynamo that should withstand the next economic downturn well is Dairy Crest Group (LSE: DCG). This defensive nature comes from selling everyday dairy staples, such as the UK’s leading cheese brand, Cathedral City, and the country’s second most popular butter spread, Clover.

Against fragmented markets, both of these brands continue to take market share and drive revenue and profit growth for Dairy Crest. Last year, revenue rose 10% to £456.8m, while adjusted pre-tax profits bumped up 3% to £62.3m.

Looking ahead, I expect further market share gains to come as management invests in marketing, brings new brands to market, and recently raised capital to expand production from 54,000 tonnes to 77,000 tonnes of cheese annually. The company’s trading update for the six months to September was released this morning and certainly suggests this is taking place as management disclosed a year-on-year increase in revenue and profits.

This forward progress, combined with the recent equity issuance that pushed net debt down to 2.1x EBITDA, is great news for the company’s already-impressive 4.9% dividend yield that is covered by earnings.

While Dairy Crest is vulnerable to swings in the price of dairy inputs, the group is well-run and is making good progress in profitable growth. Adding in its stellar dividend and significant defensive attributes, makes me believe Dairy Crest is one stock nervous investors should keep an eye on.

The post Two top FTSE 250 defensive dividend stocks to consider in September appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income
• What sort of passive income stream could you build for a fiver a day?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of PZ Cussons. 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.

Thankfully, there are two stellar small-caps I’ve got my eye on that are already thrashing the FTSE 100 and could continue to do so for a long time to come.

Dialing up growth in spades

The first is £230m market-cap customer communications specialist IMI Mobile (LSE: IMO). The company helps major clients such as Vodafone, Just Eat and Tesco keep in touch with their millions of customers online and through text messages. That includes everything from sending discount offers to booking appointments and providing updates on parcel delivery schedules.

In the year to 31 March, the company’s revenue rocketed 46% higher to £111.4m, thanks 7% organic growth and bolt-on acquisitions. Thus far, these acquisitions have been used to both broaden the company’s suite of products and move into growth markets like the US, Canada and Asia.

While profits last year grew more slowly than revenue, with adjusted EBITDA up 17.4% to £13.4m, the market clearly thinks this strategy has merits. Over the past year, the company’s share price has increased 89% and I see good potential for this tremendous growth to continue.

For one, the company is finding great success in signing larger contracts with existing customers as well as moving into new markets, like healthcare via a contract with the NHS. Plus, with some 85% of its revenue last year recurring in nature, it boasts high revenue visibility, solid margins and positive cash flow – which together, with a net cash position at year-end, provides further firepower for acquisitions.

IMI Mobile is not cheap (at 24 times forward earnings) but with a great record of organic and inorganic growth and a management team that owns a significant stake in the business, I see plenty of reasons to expect good things from the company in the future.

Painting a pretty picture

Another small-cap trouncing the FTSE 100 is cosmetics business Warpaint London (LSE: W7L). Since listing its shares in December 2016, their price has rocketed over 80%, well ahead of the meagre 5% return from the FTSE 100 over this period.

Half-year results released by the company this morning show why the market has so warmly embraced it. In the six months to June, sales rose 38.7% to £18.4m, thanks to strong like-for-like expansion of 7.3%, the acquisition of a competitor, and the purchase of its US distributor.

The acquisition of new brands pushed margins down during the period and adjusted operating profit of £2.8m was lower than the £3.1m notched up this time last year. However, the group made good progress on proforma margins. It should also benefit from rising margins again as it begins to sell these brands through its distribution network and cuts down on redundant costs.

Looking ahead, there’s great potential for the company as it benefits from fast-increasing demand for make-up products from young people, and pushes into massive markets such as the US and China.

At its current valuation of 17 times forward earnings, I think Warpain London is attractively valued considering its record of growth, profitable nature, net cash position, high insider ownership, and small-but-growing 1.68% dividend yield.

The post Have £1,000 to invest? I’d consider these growth stocks crushing the FTSE 100 appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income
• What sort of passive income stream could you build for a fiver a day?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Just Eat and Tesco. 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.

Small volumes, big profits

One was speciality chemicals firm Croda (LSE: CRDA), whose share price has risen 85% during the period. The key to success for Croda has been shifting its focus from making more commoditised chemicals for cyclical industrial end-uses towards making more profitable inputs for consumer goods like make-up as well as agricultural products.

In the first half of this year, a strong performance from these two divisions led group-wide sales up 3.76% on a constant currency basis, although forex headwinds led to a small 0.6% dip in statutory sales. Looking ahead, there’s great potential for the business to continue growing though as management increases its focus on the personal care division, which led the way in H1 with a 6.1% uptick in constant currency sales and group-leading adjusted operating margins of 34%.

Aside from high growth and bumper profitability, investors should also love this shift towards supplying the personal care industry as it isn’t very cyclical. After all, consumers keep buying moisturiser, make-up and hair products right through the business cycle – something which can’t be said for some of Croda’s other end markets such as the construction and automotive industries.

With global economic growth strong and Croda’s management team consistently growing sales and profits, I see no reason for the company’s share price not replicating recent success and proving a stellar long-term holding. However, with a valuation of 28 times forward earnings, much of this growth is already priced-in, so I’ll be waiting for a dip in its share price before I consider taking the plunge.

Benefiting from a ‘Trump bump’

An even more spectacular performance has come from equipment rental firm Ashtead (LSE: AHT). Strong demand growth from the US business has seen its share price increase over 280% in the past five years.

Judging by the company’s Q1 results to 31 July, its share price could have much further room to climb. During the period, revenue rose 22% to £1,047m with operating profits inching up by the same amount to a whopping £316m, which goes to show just how profitable renting out construction equipment can be.

Encouragingly, I still see plenty of growth opportunities for the firm in the long run as it uses its financial heft and considerable economies of scale to gain market share in the US organically and through acquisitions, and invests in new markets like Canada.

Of course, another economic downturn will strike eventually but the group’s high exposure to the US, which provides over 90% of group operating profit, should stand it in good stead right now with the American economy growing nicely. Furthermore, with the group’s net debt-to-EBITDA ratio down to 1.6x at quarter-end, its balance sheet is in good health.

At 14 times forward earnings while kicking off a decent 1.3% yield and returning lots of cash via a share buy-back programme, investors who reckon the US economy will continue to grow strongly may find now an attractive entry point to one of the FTSE 100’s best performers of recent years.

The post Two FTSE 100 super stocks crushing the index that could help you retire early appeared first on The Motley Fool UK.

More reading

• £1,000 buys 35 shares in an incredibly reliable FTSE 100 dividend stock
• Is this one of the best FTSE 100 value stocks right now?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

However, for contrarian investors, I believe Rolls-Royce may be a great income share in the making. This is mainly because the company’s relatively new CEO, Warren East, is embarking on an ambitious cost-cutting and turnaround plan that is focused first and foremost on free cash flow (FCF).

This is great news for investors as Rolls has struggled for years to generate sufficient post-opex and capex cash that can be used for such things as paying down debt or paying dividends. While it’s still early days in East’s tenure, his turnaround is already bearing fruit with FCF last year rising from £100m to £273m. This progress has continued into 2018 with the group kicking off £10m of FCF in the first six months of the year against a £264m outflow in 2017.

East’s cash flow focus is being boosted not only by his plan to trim £400m in annual costs by 2020 but also the cycle that all engine developers go through. Initially, these manufacturers have to spend billions designing new engines and sell them at little to no profit to aircraft manufacturers. It’s only over the long lifespan of these engines that Rolls truly reaps the rewards through high-margin maintenance work and replacement parts.

Rolls is coming to the end of a long period of major investments in new engines, so it should begin seeing this much more profitable work flow in soon. We’re already seeing the early stages of this as in H1, revenue at the civil aerospace division rocketed 26% year-on-year, which drove total group-wide sales up 14% on an organic basis.

With sales momentum regained and a management team finally focused on taking advantage of Rolls-Royce’s fantastic market position to juice margins and reward shareholders, I expect the company’s stock could turn into a dividend dynamo in the coming years.

A current income star

But if you’re a bit more impatient and are after big dividend cheques today, another turnaround option with promise is oil & gas services provider Petrofac (LSE: PFC), whose shares yield 4.75% currently.

The company is still firmly in turnaround mode as its founder-led management team unwinds its expensive bet on moving into direct oil & gas production that failed to pan out and has led to major writedowns. So far this year the company has announced $0.8bn in divestments that are helping to return the focus to its core services business and whittle down its large net debt position.

As oil prices rise to levels not seen in years, we’re also starting to see a turnaround in Petrofac’s core business. In H1, net margins rose from 5.1% to 6.8% as the company won more contracts and worked more hours on contracts it already has. This led earnings per share to jump 22% to 56.1 US cents, more than covering the unchanged 12.7 cent dividend per share.

However, while Petrofac is making good progress and pays a hard-to-beat dividend, I’d urge caution right now with the SFO’s bribery investigation continuing to cast a shadow over the group’s future.  

The post Rolls-Royce could be the most overlooked FTSE 100 income giant in the making appeared first on The Motley Fool UK.

More reading

• Where will Rolls-Royce shares go next? Let’s ask the experts
• Up 1,119% in 65 months, is there anything left to say about Rolls-Royce shares?
• Could this cheap FTSE 100 stock be the next Rolls-Royce?
• Should investors snap up Rolls-Royce shares on the dips?
• Are Rolls-Royce shares’ best days behind them?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Non-cyclical and growing fast

One sector that can depend on relatively robust demand throughout the economic cycle is pharmaceuticals. And of UK-listed pharma giants, one of my favourite is Shire (LSE: SHP). This is because the group has pivoted over the past few years to become a global leader in treatments for rare diseases, an area that commands high prices and has little competition.

In the first half of this year, the shift towards these higher-priced treatments paid off, with the group reporting a 3% constant currency uptick in revenue to $3.8bn. There was also a whopping 108% increase in operating profits, to $0.8bn, as costs related to its blockbuster Baxalta acquisition died down.

During the period, the business generated a significant $756m in free cash flow, which allowed management to reduce net debt by some $1.4bn during the period, to $17.6bn. For the time being, management will need to continuing prioritising de-leveraging rather than boosting meagre dividends. But over the longer term, there’s some income potential if management doesn’t prioritise more acquisitions.

Unfortunately for domestic investors attracted to Shire, the company is currently in the process of being acquired by Japanese pharma giant Takeda, for £49 per share. However, Shire’s current share price is significantly below this level, as many investors believe either Takeda’s nervous shareholders, or regulators, will nix the debt-fuelled deal.

With this in mind, I’m not buying shares of Shire right now. But if Takeda’s bid falls through, and Shire’s share price drops, it’s certainly one defensive stock that would high on my watch list.

Everyone loves a coke

But with Shire possibly off the table for domestic investors, I think another defensive share worth considering is Coca-Cola HBC (LSE: HBC). Coca-Cola HBC is the brand’s bottler serving 28 countries, stretching from Italy and Ireland in the west, to Russia in the east, and Nigeria in the south.

The group’s defensive characteristics are quite high as consumers tend to continue making small purchases, like a bottle of Coke, throughout the business cycle. Furthermore, with more than half of its sales coming from developing and emerging markets, such as Hungary, Ukraine and Bosnia, its fortunes are less tied to economic health in key developed markets, like Western Europe and North America, than many other FTSE 100 peers.

Over the longer-term, exposure to these markets is a big positive since they’re generally experiencing high levels of economic and population growth. In the first six months of the year, these attributes helped boost volumes sold by 4.6% year-on-year, with net revenue up 6.4% on a constant currency basis to €3.2bn. The group’s management has also implemented margin improvement measures that increased operating profits during the perod by a whopping 14.1%, to €0.3bn.

Rising sales and margins are also fueling increases to the dividend that currently yields 1.87% annually. While this yield is below the FTSE 100 average, I think the company’s defensive nature and rising profits could make it a solid, non-cyclical option for nervous investors at its current price of 21 times forward earnings.

The post Worried about the next recession? Consider these FTSE 100 defensives appeared first on The Motley Fool UK.

More reading

• Here’s how a £20k ISA could earn you a £6,493 income every month!
• With the FTSE 100 down 5%+ investors should remember this legendary quote from Warren Buffett
• £20k in a Stocks & Shares ISA? Here’s how to target a £3,854 monthly passive income
• Forget short-term pain. Consider these 3 FTSE shares for long-term gain!

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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.