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Too cheap to ignore? A FTSE 250 dividend stock yielding 6%

When interdealer broker Tullett Prebon plc merged with peer ICAP in 2017, management promised investors that the new company would become a dominant force in global financial markets and profits would surge.

Unfortunately, TP ICAP (LSE: TCAP) as the new business is called, has failed to live up to expectations.

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Complex business

It was all going well until the beginning of 2018. Soon after shares in TP ICAP hit a new all-time high of around 550p, the company disappointed analysts by warning that higher than expected costs associated with investment in its business and complying with new regulations would hit profits for the full year.

Following the warning, analysts have revisited their numbers. They now expect earnings per share (EPS) to fall by 22% for 2018.

The market has reacted to this news badly. The stock has lost around half its value since peaking in January and now changes hands for just 8.2 times forward earnings.

However, I reckon this is an overreaction. Merging two businesses was always going to be a complex operation, and while earnings may suffer in the short term due to rising costs, over the long run, the group’s enlarged scale should more than make up for earnings volatility.

According to analysts, after falling this year, in 2019 EPS should stabilise. What’s more, TP ICAP’s low valuation gives a wide margin of safety for investors if growth stutters again and also offers plenty of upside potential for when the company finally returns to growth.

Indeed, right now the rest of the financial services sector trades at a forward P/E of just under 15, indicating a potential upside of more than 82% for when confidence in the company returns. And as well as the low earnings multiple, investors will also receive a 6.1% dividend yield, which looks to me to be extremely secure as it is covered twice by EPS.

Premium growth 

It has been a better year for document manager Restore (LSE: RST). Even though the company’s share price has drifted lower by around 15% since the beginning of the year, analysts are still forecasting EPS growth of 49% for 2018, followed by an increase of 13% for 2019.

It looks to me as if Restore is well on the way to meeting this goal. The company’s half-year results (published this morning) showed a 9% uplift in revenue year-on-year to £95m and 13% increase in profit before tax to £17.3m. 

For the rest of the year, the company’s bottom line is set to see a boost from the acquisition of TNT Business Solutions, which Restore completed in May. Like TP ICAP, Restore faces a challenge to integrate the bolt-on acquisition over the next few months, but when completed, the enlarged group should be well placed to produce positive returns for investors — as current City numbers show.

The one downside I can see is that Restore’s valuation doesn’t leave much room for mistakes. Trading at a forward P/E of 17.2 there’s already a lot of good news baked into the stock price. However, if the company can hit City growth targets, I think the multiple is justified.

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Rupert Hargreaves does not own any 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.