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A growth-plus-dividend stock I’d buy ahead of Vodafone Group plc

Dechra Pharmaceuticals (LSE: DPH) shares are up 47% in the past 12 months, while posting a five-year gain of 235%.

The price hardly moved Friday morning after an AGM-day trading update, but that doesn’t take anything away from the stock for me — especially as the company said everything is going according to plan with “continued growth across all of its markets.”

Dechra develops veterinary medicines for dogs, cats and horses, and that’s big business across the world. From its base in Northwich, expansion has been global, and in the year to June 2017 only 15% of its turnover came from the UK. The firm’s biggest market was the USA, accounting for 35%.

New markets

In addition to the developed world, people in developing countries are turning to pets as a means of expressing their growing wealth, and there are potentially huge markets to be had in the East in the coming years.

Dechra has more than doubled its earnings per share (EPS) since 2013 from 29.27p, to 64.68p by 2017. At the same time, the dividend has been boosted by more than 50% to 2017’s 21.44p — and you’ll have spotted that this means cover by earnings has risen, reaching a very safe-looking three times.

Analysts have a further 13% EPS rise pencilled in for the year to June 2018, and expect the dividend to grow by an additional 7.7%. The yield is low for now at a little over 1%, but I see a future cash cow in the making here when Dechra reaches its mature size.

The shares are on a forward P/E of 29 right now, and that’s higher than I’d ideally like — but I only see it as the top end of an attractive valuation range.

Telecoms direction

If you search for combinations of big dividends and growth forecasts in the FTSE 100, you’re sure to find Vodafone Group (LSE: VOD).

After a couple of years of falls to 2015, EPS has picked up again, and two more years of the same are forecast — by March 2019 EPS should have gained 63% since that recent low.

You can’t miss the dividend, which has kept on rising — forecast yields stand above 6%. But earnings would only cover a little more than half that amount, and I really can’t figure out what the telecoms giant is up to on that score.

After years of looking to me like a lot of different telecoms firms under one umbrella rather than a joined-up global leader, Vodafone is in the process of modernising itself to present a more global brand. Details of exactly what’s going to happen are thin, but it’s surely going to be part of this ‘everything connected digitally’ mantra that’s being chanted by almost everyone these days.

Business growing

Until that happens, the customers are rolling in, with the company boasted 83.5m 4G customers worldwide at 30 June, and the number is growing rapidly.

The share price has fallen back over the past five years, to 218p, and what I saw as a ‘takeover mania’ overvaluation has largely evaporated — and on forward P/E multiples of around 25-28 (rather than 40 a couple of years ago) I don’t think it’s overstretched now.

But I’m still troubled by that dividend policy. The company seems to have the cash to keep paying, but I have an old-fashioned idea that ordinary dividends should come from earnings. Perhaps I’m strange.

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Alan Oscroft 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.