Down by 55% in one year, Royal Mail has been a painful investment. As I explained in February, I’m waiting for May’s results to gain a fuller picture before I decide whether to sell my shares in the postal operator. But I’m not hopeful. In fact, I don’t see any reason to buy this stock at the moment, given the challenges facing the group.
In my view, there are much better options for income investors elsewhere in the FTSE 250. Today, I want to consider two companies that have cropped up on my investing screens.
Turning waste into cash
Water and recycling firm Pennon Group (LSE: PNN) is one of my top picks in this sector. The company — which operates South West Water and Viridor Recycling — said today that both arms of its business are performing well and are expected to deliver full-year results in line with forecasts.
One thing I like about this business is that it’s not just a water utility. Although the regulated water business should provide predictable returns to help support the group’s dividend, growth opportunities are likely to be minimal.
That’s not the case with recycling, in my opinion. This is an evolving sector that’s only partially regulated. Given our environmental concerns, recycling seems likely to become bigger and more important over the coming decades.
Although the Viridor business is exposed to market pricing for recyclate material, which can be volatile, I think the firm’s strategy of developing large-scale recycling and energy recovery facilities is likely to work well.
Pennon shares look attractively valued and the dividend hasn’t been cut for 12 years. With a 5.3% dividend yield on offer for the current year, I’d be happy to tuck some of these away.
Another 5% dividend grower
Pennon isn’t the only FTSE 250 firm with a long dividend history. Oil and energy services operator John Wood Group (LSE: WG) has increased its payout every year since 2005.
Despite this strong track record, the firm’s shares dipped recently after chief executive Robin Watson said that debt reduction “will be more gradual than originally anticipated.”
Wood Group has historically operated with fairly low levels of debt. But when it acquired rival Amec Foster Wheeler in 2017, it took on Amec’s £1bn net debt as well. Although the combined group’s total net debt fell from $2bn (£1.5bn) to $1.5bn (£1.2bn) last year, further reductions are expected to be slower. This is mostly because the oil and gas sector has not returned to growth as quickly as expected after the 2015 crash.
I’m not worried
I’m not concerned by this. Wood Group’s latest results suggest to me that its core attractions of strong cash generation and stable revenue remain intact. In my view, this is one of the best long-term picks in the energy services sector. The Amec Foster Wheeler deal has diversified the firm’s portfolio and should reduce its long-term dependency on oil and gas.
In the meantime, I think the current valuation reflects the lower pace of growth that’s now expected. At the time of writing, the shares were trading on 10 times 2019 earnings, with a forward dividend yield of 5.1%. I maintain my buy rating.
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Roland Head owns shares of Royal Mail.