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Why I’d shun the Sound Energy share price and buy this growth-plus-dividend stock instead

Sound Energy (LSE: SOU) shares have lost more than 50% since a mid-2017 peak, but could they be set for a rebound?

The Morocco-focused oil explorer revealed a new basin model of Eastern Morocco Portfolio targets at the end of June, which prompted exploration director Brian Mitchener to say: “We expect this new oil play to be the target of our forthcoming third exploration well. In addition, this basin model significantly derisks the charge available to our individual prospects.

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Further, at year-end at 31 December 2017, the company reported a cash balance of £21.2m, which looked healthy enough, and this month reported a successful new $15m placing.

The company is sitting on some tempting looking oil prospects and investors seem to be happy to pony up the cash needed to get them pumping. So why would I avoid the shares?

How risky?

I’m minded of UK Oil & Gas, whose shares hit the buffers when early flow tests proved disappointing. I do actually have high hopes for UKOG, but it highlights the big risk faced by oil explorers in their early days.

In 2017, Sound Energy recorded a total loss of £34.1m, though £21.8m of that was from discontinued operations, and losses are expected to continue for a few years yet. There’s no guarantee that its assets will live up to the optimism, and how much more cash will be needed and how much dilution that will bring is anybody’s guess. It’s way too risky for me.

Steady growth

Turning to a very different company, but one which has been a pretty successful growth investment, I was impressed by the latest update from Computacenter (LSE: CCC).

In its second quarter update, the provider of IT infrastructure services told us it has enjoyed a “strong start to the year” and that it believes its full-year results “will now be comfortably in excess of its previous expectations set out in the Q1 trading update.

Its supply chain business has been doing well, especially in Germany.

Existing forecasts suggest a 6% rise in earnings per share for this year, which would have put the shares on a forward P/E of 20. Perhaps stretching? Well, we’ve been seeing steady year-on-year growth that has taken EPS from 43.7p in 2013 to 65.9p last year, and I reckon that warrants a premium valuation. And new forecasts should improve the outlook.

Cash too

On top of that, Computacenter has been pursuing a progressive dividend policy, with its annual payment rising from 17.5p per share to 26.1p over the same period, and that’s expected to reach 29p by 2019. 

You might not be too impressed by predicted yields of only around 2%, but the key thing for me is that dividends have been pushing well ahead of inflation. They should also be covered around two and a half times by earnings. Oh, and Computacenter has oodles of cash.

And that is really what I look for in a long-term dividend stock. High yields today are very valuable, but tomorrow’s cash cows can bring some long-term stability to your portfolio.

With the shares having put on 160% over five years, those who bought back in 2013 at around 600p will have locked in an effective 2018 dividend yield of 4.6% on their purchase price. I reckon there’s more to come.

Capital Gains

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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.