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A 6% FTSE 100 dividend growth stock I’d buy today, and a falling knife I’d sell

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Earlier this week, McBride (LSE: MCB) issued a shock profit warning that sent shares plunging. 

According to the manufacturer and supplier of private label products, while revenues are still growing, it’s having trouble passing rising costs on to customers. And while management expects raw material costs to fall back in the second half of 2019, the group is also facing problems with its delivery network. “Distribution costs continue to rise beyond our previous estimates due to market rates and efficiency challenges driven by logistics capacity shortfalls and internal service gaps,” the trading update reported.

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Considering all of the above, management now expects adjusted profits before tax to fall between 10% to 15% in 2019. 

Time to sell

I can see why investors were quick to sell McBride following this disappointing trading update. Looking over the group’s historical numbers, it’s clear the business has been struggling to grow for some time, and this latest set back seems to suggest that management can’t get it right.

Manufacturing private label household and personal care products is a low margin business — the company’s operating profit margin has averaged 4.3% for the past three years — so only a slight rise in costs can have a significant impact on the bottom line. 

With that being the case, even though McBride is currently dealing at a forward P/E of 5.5, I would avoid the stock for the time being. At this point it’s difficult to tell when the business will return to growth, and Brexit disruption could severely impact the company. 

Growth machine 

On the other hand, FTSE 100 wealth manager St. James’s Place (LSE: STJ) seems to be an unstoppable growth machine. 

According to my research, its earnings per share have expanded at a compound annual rate of 5.3% over the past six years, which has supported a five-fold increase in the group’s dividend payout to investors. The stock currently supports a dividend yield of 5.1%, above the FTSE 100 average of around 4.7%. 

Compared to McBride, St. James’s is, in my opinion, by far the better investment. It’s not just the firm’s dividend growth that leads me to that conclusion. The company also has a much stronger brand and economic moat. The business is recognisable all over the UK as one of the country’s premier wealth managers. By comparison, McBride lacks the same brand awareness. 

And I think now could be the perfect time to snap up shares in St. James’s following a weak fourth quarter trading performance that put investors off the company. 

Perfect opportunity 

Due to market volatility, investor inflows to the wealth manager slowed, and the group posted a fall in assets of £5bn in the fourth quarter.

However, the wealth manager still succeeded in recording net inflows of £2.6bn as clients continued to seek its face-to-face advice. Market losses weighed on overall assets under management, which declined to £95.6bn, down from £100.6bn at the end of September. 

Because markets have recovered substantially since the end of 2018, I think that when the group next reports its assets under manageent figure, we will see a strong recovery. I think it might be a good idea to buy in before we get the numbers.

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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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