The Motley Fool

Have £2,000 to invest? Here are two FTSE 250 dividend stocks I’d buy today

Today, I want to look at two FTSE 250 dividend stocks that I believe have the potential to provide an attractive long-term income.

My first company could be a controversial choice. Engineering group Babcock International Group (LSE: BAB) has come under attack from short sellers recently. The company disputes most of these allegations, but today’s half-year results have left the shares down by 5%, at the time of writing.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Good and bad news

Investors fear that Babcock will turn out to be another outsourcer with loss-making contracts, shrinking profit margins, and too much debt. In my view, today’s figures justify some of these concerns, but certainly not all of them.

The good news was that the group’s underlying results were in line with expectations. Exiting low-margin businesses helped to lift underlying operating profit rose by 1.4% to £279.6m, even though revenue fell by 2.3% to £2.577bn.

A significant improvement in free cash flow provided the cash needed to reduce net debt by £159m, to £1.132bn. This reduced the group’s net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) multiple from 1.9x to 1.6x.

Looking ahead, the group’s combined order book and pipeline expanded by 3% to £32bn, including £650m of new orders from the Ministry of Defence.

Unfortunately, today’s figures also included some bad news. The firm’s contract to decommission Magnox nuclear reactor sites ends next year. Management now expect revenue to fall by about £250m, more than double previous guidance of £100m. The loss of the contract is expected to wipe £20m off the group’s operating profits.

Guidance unchanged

Chief executive Archie Bethel says that the outlook for the 2018/19 financial year is unchanged. He’s expecting single-digit revenue growth and improved profit margins.

Broker forecasts put the shares on a 2018 forecast price/earnings ratio of 6.6, with a dividend yield of 5.2%. If the outlook remains stable, I believe these shares could be an income buy.

A safer option?

If you’re concerned about the outlook for Babcock, one alternative I’d consider is FTSE 250 engineer QinetiQ Group (LSE: QQ). This business is focused on developing its own products and technology, which should give it a stronger competitive edge.

QinetiQ’s business mainly operates in the defence and aerospace sectors. Historically, it’s worked mostly for the UK Ministry of Defence, but this is changing. International customers accounted for 31% of revenue during the first half of the year, up from 26% during the same period last year.

One reason for this changing strategy is that profit margins on UK government contracts are falling. As a result, analysts are forecasting a 10% fall in underlying earnings per share this year, with a modest return to growth in 2019/20.

The group’s half-year results supported this view. Underlying operating profit fell by 11% to £51.1m, despite sales rising 7% to £420.3m.

Falling profit margins aren’t ideal. But I believe the firm should be able to continue winning attractive new work. In the meantime, a net cash balance of £250m means that management has money available to invest in new opportunities.

QinetiQ shares have risen by 15% so far this year. This has left the stock trading on a forward price/earnings ratio of 15.5, with a 2.4% dividend yield. This isn’t cheap, but I think the long-term potential of this business means the price is fair.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Roland Head 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.