These FTSE 250 dividend stocks look dangerously overvalued

Royston Wild discusses two FTSE 250 risers (INDEXFTSE: MCX) looking far too toppy.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While questions over the consequences of Brexit in the near term and beyond continue to circulate — and are unlikely to be answered for some time yet — investor appetite for stocks that have already been whacked by last June’s ‘leave’ vote has boomed in recent months.

Indeed, embattled outsourcers Capita Group (LSE: CPI) and Mitie Group (LSE: MTO) have both seen their share prices leap in recent months.

Although still trading at an 47% discount to levels seen on the eve of the referendum result, Capita has picked up more recently and touched its highest since November earlier this month. And its FTSE 250 peer has fared even better, a share price spurt this month leading it to trade just 11% lower from levels seen on the day of the EU vote.

Investment questions

But the investment community is being just a bit too hasty jumping back in now, in my opinion. Both companies have had to issue a stream of profit warnings since the autumn as trading activity has slowed down. And recent economic data suggests that the revenues outlooks at both Mitie and Capita remain less-than-compelling.

The Bank of England’s latest inflation report this month led many to claim fears of cooling business investment had been overdone.

The Old Lady of Threadneedle Street suggested that the near-term outlook had improved since its last report in February, with supportive credit conditions, resilient demand and the incentive created by weak sterling for exporters to invest prompting businesses to pull out their chequebooks once again.

However, the Bank noted that “a number of exporters and foreign‑owned firms remain cautious about larger investment decisions due to uncertainty around future UK trading arrangements.” And it said that this caution could be set to persist, adding that “uncertainty surrounding the United Kingdom’s future trading arrangements is likely to weigh on firms’ investment intentions in coming years.”

Lasting woe?

With no signs of an imminent upturn in spending, the City expects Capita to endure a 4% earnings fall in 2017, following on from last year’s 20% slide. And given the possibility that this bottom-line weakness could well last beyond this year, and these forecasts suffer severe downgrades in the months ahead, I do not think a forward P/E ratio of 10.5 times is attractive enough to tempt savvy investors.  

Likewise, Mitie Group is predicted to have suffered a shocking 50% earnings drop in the year to March 2017, although it is expected to rebound with a 31% rise in the present period. However, this forward projection still creates a shockingly-high P/E multiple of 14.6 times and, given that conditions are still yet to improve on the ground, this heady rise looks a tad optimistic to me.

The business advised just last month that revenues flatlined in the last fiscal year, “reflecting what has been a challenging environment.”

Patchy projections

Given this backcloth, I think stock pickers should ignore predictions of chunky dividends and invest elsewhere. And they are undeniably chunky. In 2017 Capita is anticipated to maintain the 13.7p per share of the past two years, yielding 5.7%.

Mitie, meanwhile, is predicted to bounce from a severe dividend cut (a 7p payout is expected for fiscal 2017, down from 12.1p in the prior year) and to lift the reward to 7.8p. This forecast yields a market-beating 3.7%.

But until more clarity surrounding the UK economic outlook becomes apparent, I believe both outsourcers are a risk too far at present.

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 assessed. Consider taking independent financial advice.

Royston Wild has no position in any 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.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »