Even though the FTSE 100 has experienced a pullback in recent months, there are still a number of companies in the index that appear to be overvalued. This is not a major surprise, of course, since the index has enjoyed a period of significant growth in recent years which has seen it double since its 2009 lows.
As such, now may be a good time to sell shares that appear to be excessively priced. Here are two prime examples that may offer strong dividend growth, but which lack sufficiently wide margins of safety to merit investment.
Reporting on Thursday was support services company Rentokil (LSE: RTO). The business enjoyed a positive first quarter of the year, with its ongoing revenue increasing by 15.7% at constant exchange rates. Organic revenue growth of 3.2% was up slightly on the previous quarter’s figure of 3.1%. And when weather conditions and the disruption they have caused are excluded from the figure, it remains in line with growth from the comparable period a year ago.
The company’s acquisition programme has continued. During the quarter it made 11 pest control acquisitions in addition to the Cannon Hygiene business acquired in January. Further M&A activity looks set to take place during the remainder of the year, with the business having a strong balance sheet which could facilitate a higher level of acquisition activity.
While Rentokil has been able to increase dividends per share by almost 100% in the last five years, it has a dividend yield of only 1.6%. This suggests that it may be overvalued, while a price-to-earnings growth (PEG) ratio of 2.3 indicates that it fails to offer growth at a reasonable price. Therefore, even though from a business perspective it appears to be performing well, it seems to lack investment appeal at the present time.
Also lacking investment potential within the FTSE 100 is wealth manager Hargreaves Lansdown (LSE: HL). The company appears to be overvalued even though it is in the midst of a favourable period when it comes to earnings growth.
Looking ahead, the stock is expected to deliver a rise in its bottom line of 13% in each of the next two financial years. However, it trades on a PEG ratio of 2.5, which suggests that the market has already factored-in its growth outlook. This could lead to poor share price performance – especially with investor confidence having the potential to change rapidly.
While Hargreaves Lansdown is due to raise dividends per share at an annualised rate of 26% over the next two financial years, its forward yield of 2.8% suggests that it still does not offer impressive income prospects when compared to other stocks in the FTSE 100. As such, now could be the right time to sell it after the index has experienced a recovery of sorts in recent trading sessions.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.