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Why I’d buy and hold this dividend growth stock for a decade

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Banking and investment group Investec (LSE: INVP) has struggled to prove itself over the past five years. Shares in the company have only kept pace with the FTSE 100 over this period, although earnings have nearly doubled. 

What’s more, the company has a long history of increasing its dividend distribution to investors. With this being the case, today I’m taking a look at why you should consider including Investec in your portfolio.

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Slow and steady 

As covered above, over the past five years Investec’s shares have underperformed, but reported earnings per share have increased by 120%. 

In other words, Investec is a growth champion, but the market seems to be ignoring its potential. The stock currently trades at a forward P/E of 10.3, a third below the banking and financial sector industry average of 15.5. 

It wasn’t always this way. Several years ago, the company commanded a premium valuation of 17 times forward earnings. The same kind of multiple today would mean a share price of 901p, 58% above current levels. 

So what’s gone wrong? It would appear that the market is concerned about Investec’s outlook. A challenging backdrop in South Africa and the UK, the group’s two core markets, could stifle growth growing forward, and increased competition in the wealth management sector may only add to management’s troubles.

Still, according to the group’s full-year results, released today, clients are still signing up to its offering. The wealth and asset management arm of the business hit £100bn of funds for the first time, while the specialist bank “continued to see good client acquisition,” according to CEO Stephen Koseff. 

On the back of this performance, the firm announced a final dividend of 13.5p per share, taking the full year distribution to 24p, up 4.3% year-on-year. If Investec can continue on its current trajectory of steady earnings and dividend growth, then I believe it is only a matter of time before the market re-rates the share price to a higher multiple. 

It could be worth jumping on this undervalued opportunity today before it is too late. 

Beating expectations 

Another dividend growth stock that’s recently appeared on my radar is 4imprint (LSE: FOUR). Over the past five years, this company has more than tripled its dividend distribution to investors as reported earnings per share have increased by 170%. 

City analysts had been expecting the group to take a step back in 2018 following the breakneck growth, but at the beginning of May, it once again surpassed expectations announcing “trading performance in the first four months of 2018 has been above the board’s expectations, with revenue growth of 16% and order intake up 15% over prior year.” 

Growth for the year is now projected to be “higher than current market consensus.” Analysts had been expecting the company to cut its dividend distribution by 38% for the year giving a yield of 2.4%, but based on the buoyant year-to-date trading, I believe investors could be in line for a bigger payout than expected. 

And while the company’s income potential is exciting, as my Foolish colleague Ian Pierce recently pointed out, 4imprint’s story is going to be growth-focused in the years ahead, as management is targeting $1bn in sales by 2022. 

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Rupert Hargreaves owns no share 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.

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