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2 dividend stocks Neil Woodford has bought in October

A look at regulatory news announcements of the last two weeks reveals that Neil Woodford has been building stakes in two dividend stocks. He may still be adding these new additions to his portfolios at current prices, which makes them worth more than a passing glance in my view.

The two companies in question are FTSE 250 IT infrastructure firm Softcat (LSE: SCT), which is set to release its annual results next Wednesday, and small-cap 10-pin bowling operator Ten Entertainment (LSE: TEG).

Softly, softly

Woodford’s initial stake-building in Softcat during August passed under the radar. There was no mention of it in his monthly update published last month, although it was tucked away in the full portfolio listings of both his flagship Equity Income fund and Income Focus fund. However, last week his ‘softly, softly’ stake-building took his holding in the company to 10.25m shares and above the mandatory disclosable threshold of 5%.

Softcat is one of the UK’s leading providers of IT infrastructure products and services to the corporate and public sectors. It was founded in 1993 but is a relative newcomer to the stock market having listed at 240p a share in 2015.

The company is delivering decent top- and bottom-line growth and is forecast to post earnings per share of 20.1p for its financial year ended 31 July in next week’s results. With the shares at 433p as I’m writing, the price-to-earnings (P/E) ratio is 21.5. This isn’t particularly cheap, although it’s worth bearing in mind that companies in the technology sector typically trade on higher-than-average P/Es.

Dividend attraction

I suspect Woodford is particularly attracted by Softcat’s strong balance sheet (cash of £46.6m and no debt at its last half-year-end), cash-generating abilities and the board’s stated intention to “return excess cash to shareholders over time.” Last year, the company paid a special dividend of 14.2p on top of an ordinary dividend of 5.3p, giving a trailing yield of 4.5% at the current share price.

The City consensus dividend forecast for the current year is 13.65p (3.2% yield), although whether a lower special dividend is widely expected or whether some analysts’ forecasts for the ordinary dividend only are mixed in the consensus I’m not sure. Either way, I can see why Woodford finds Softcat an appealing investment proposition.

Bowled over

Ten Entertainment is an even more recent stock market flotation than Softcat, having listed at 165p a share as recently as April this year. It’s the second largest 10-pin bowling operator in the UK with a total of 40 sites. The shares are trading at 200p as I’m writing and the City consensus earnings forecast for the current year to 31 December gives an undemanding P/E of 12.2, falling to 10.5 for 2018.

Ten also has an attractive dividend policy of paying out 60% of profits. The current year consensus gives a yield of 4.8%. However, as the dividend is pro rata from the April listing date, next year’s first full-year payout is forecast to lift the yield to 5.8%.

The stock didn’t appear in Woodford’s last published portfolio listings at 31 August. However, a regulatory announcement last week disclosed he’s built a 7.9% stake in the company with a holding of 5.15m shares. I can see why he’s been bowled over by this stock. Indeed, it looks very buyable to my eye, due to the lower P/E and higher yield than Softcat.

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G A Chester 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.