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Why I’d ditch Lloyds Banking Group plc to buy this dividend and growth stock

After a challenging year in 2016 that led to a profit collapse, Sprue Aegis (LSE: SPRP) is bouncing back. The company designs and distributes smoke and CO alarms, including those that can be connected to the internet, and City analysts predict a 128% recovery in earnings this year and 32% during 2018.

Strong balance sheet

Today’s interim results show revenue broadly flat compared to a year ago and basic earnings per share coming in at 2.8p, which demonstrates a much better outcome than the 1.3p per share loss during the first half of 2016. One of the things I like about the company is its debt-free balance sheet, which shows a cash pile of £10m, although a year ago the firm had almost £15m in cash. I’m optimistic that a profit recovery will stem any further cash outflow from the firm’s coffers.

The firm sells its products under the brand names FireAngel, SONA and AngelEye, claiming that it owns a patented intellectual property in Europe, the US and other territories. Executive chairman Graham Whitworth reckons Sprue Aegis is “transforming into a lean, technology-driven safety products business in the high growth potential connected home safety products market.”  

Positive developments

The company aims to become an independent technology business with outsourced manufacturing, and the directors think a new manufacturing and supply agreement signed with a firm called Flex during March will drive strong progress in 2017 and 2018. A focus on product innovation and promotion of its FireAngel brand should help the firm exploit new and existing markets with a wider product range. The outlook is positive.

At today’s 212p share price, the forward price-to-earnings (P/E) ratio runs just under 18 for 2018 and the forward dividend yield is 4.7%. I don’t think the valuation is excessive for a firm with such decent-looking forward prospects.

Cyclical to the core

I’d rather take my chances with Sprue Aegis than with Lloyds Banking Group (LSE: LLOY). The banking giant’s share price has been moving sideways for almost four years and it seems unlikely that a sudden surge upwards will occur anytime soon. What would drive it? City analysts predict that earnings will advance almost 160% this year, but the stock market has taken that recovery in its stride. It looks like investors expected the rebound in earnings but the firm seems unlikely to repeat the feat. During 2018, the forecast is for earnings to slip back by 4%. Meanwhile, the share price put in its big rise for the current business recovery around four years ago. 

Today’s share price around 66p throws up a forward dividend yield just over 6.5% for 2018, but I wouldn’t buy the stock for that. Lloyds is an out-and-out cyclical business, which means that profits and the dividend could all disappear as fast as the share price could plummet if the UK economy takes a dive. Right now, I’d ditch Lloyds Banking Group because I think the downside risk outweighs the upside potential. Having sold out, I’d likely put the proceeds into a firm such as Sprue Aegis to capture its chunky dividend yield and growth prospects. 

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking 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.