Two FTSE 100 dividend growth stocks I’d sell straight away

These two FTSE 100 (INDEXFTSE: UKX) shares appear to be grossly overvalued.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Strong performance

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.

High valuation

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »