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2 FTSE 100 dividend stocks I’m avoiding for now

It’s hard to put a price limit on a successful business. Companies with high profit margins, good growth and strong management can outperform expectations for years on end.

In my view, catering specialist Compass Group (LSE: CPG) is a very good example of this. Operating profit rose by 24.6% to £877m during the six months to 31 March, while sales were 20.3% higher at £11.5bn.

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However, the majority of these gains were the result of the weaker pound. On an underlying constant exchange rate basis, operating profit was 5.2% higher during the first half, while sales rose by 3.6%.

That’s still a strong performance and to celebrate, Compass has announced a £1bn special dividend for shareholders. I estimate this is worth about 60p per share, which together with the group’s ordinary dividend should give a yield of about 5.8% in 2017/18.

Is Compass a buy?

That’s a tough question. I believe this is an excellent company, but I’m not sure the balance of risk and reward is attractive for new buyers at current levels.

Compass reports in sterling but does most of its business outside the UK. So the fall in the pound last year has given its profits a big boost. Looking ahead, the stock now trades on a forecast P/E of 22 with an ordinary dividend yield of 2.2%.

Although I’m not concerned about the underlying performance of the business, I’m not sure if this valuation provides enough protection against potential currency headwinds or a change in market sentiment.

My personal view is that Compass stock rates as a hold today, and a potential buy on future market dips.

Is this stock heading for value territory?

Television group ITV (LSE: ITV) has been a standout performer in recent years. But the firm’s stock fell by 2% this morning. ITV shares have now fallen by 30% since peaking at 280p in 2015.

The company said that total revenue fell by 1% to £840m during the first quarter. The main contributor to this decline was net advertising revenue, which fell by 9% to £393m. Although this fall was partially offset by revenue from ITV Studios, which rose by 7% to £343m, the overall trend was negative.

Departing chief executive Adam Crozier has worked hard to grow the Studios business, reducing ITV’s dependency on advertising revenue. This strategy has worked well and the group says that it has already secured more than 75% of expected full-year revenue from ITV Studios.

However, advertising remains a key source of income for the group. With Mr Crozier due to depart in June, I’d be tempted to wait for news from his replacement before forming a view on the stock.

My concern is that ITV’s profits will continue to come under pressure from falling ad revenues over the next year. Although earnings per share are expected to rise by about 8% this year and by 4% in 2018, analysts have cut their forecasts for the stock over the last year.

ITV’s 4.2% forecast dividend yield may look attractive, but I don’t see any point in rushing into this stock at the moment. I suspect there will be better buying opportunities over the next year.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended ITV. 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.