When it comes to the age-old question of whether to go for a growth shares or to look for solid dividends, we often don’t have to choose — there are plenty of companies that potentially offer both. Today I’m looking at two, quite different ones.
One is Severfield (LSE: SFR), which has gone through several partial name changes in its history. The structural steel company suffered a tough patch and recorded a few years of losses, but since returning to positive (although very low) earnings per share in 2014, all the signs have been of an impressive recovery.
After a strong year to March 2017, forecasts suggest further growth in earnings for the current year together with steadily rising (and well covered) dividends, and Tuesday’s interim results supported that nicely.
The share price gained 11% to 71.5p after the company reported a 59% rise in underlying pre-tax profit to £12.9m, after revenue grew by 16%. Underlying basic EPS came in 56% ahead at 3.5p, and the first-half dividend was hiked by 29% to 0.9p.
Outlook getting better
Crucially, the firm reported a continuing strong cash performance, leaving it with net funds of £31.4m at 30 September (from £32.6m in March, but after paying some debts.)
With strong order books in both its UK and Indian markets, full-year results are apparently “expected to be comfortably ahead of previous expectations.”
We’re now looking at a modest forward P/E of under 12 based on current forecasts, and that will surely fall when they’re upgraded after the latest results.
The firm’s progressive dividend is tipped to yield 3.5% this year and 3.8% next. Looks like a buy to me.
My next subject is a classic growth stock in the shape of Scapa Group (LSE: SCPA), whose shares have seven-bagged over the past five years, to 470p as I write — with the firm bringing in double-digit rises in earnings per share for years.
And though dividend yields are still low, they’re nicely progressive and we could be looking at a long-term cash cow.
Further EPS rises of 15% and 11% are forecast for this year and next, to which Tuesday’s interim results lent support. Though revenue grew by a fairly modest 7.5% (1.6% at constant exchange rates), adjusted pre-tax profit rose 33.1% with adjusted EPS up 29.7%.
Net debt is down from £16.1m to £3.2m, even after the £7.6m acquisition of Markel Industries.
The manufacturer of adhesive-based products for the Healthcare and Industrial markets saw both divisions doing well, with strongly increasing margins — up from 1.9% to 16.1% in the healthcare sector, with industrial margins up from 2.2% to 11.5%.
Why I’d sell
Impressive, so why would I sell? As I previously said in June, I think the shares are too expensive now, on a forward P/E of 27. I reckon I’m seeing the start of that phase which hits every classic growth share sooner or later, when early EPS rises start to slow down a bit and investors start taking profits.
In fact, since a peak in early June, Scapa shares have lost 9%, and though that’s very short term, they did dip a lot lower in September — and we’re seeing those erratic ups and downs that often mean the surefire enthusiasm of early investors is wearing off and they’re starting to look for the next big thing.
Scapa is a tempting company, but I foresee better buying opportunities to come.
Can you make a million?
Investing in companies with growth and cash potential like Severfield or Scapa, at the right price, can be a great step on the road to financial security, and even millionaire status.
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Alan Oscroft 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.