This FTSE 250 dividend and growth play looks a better buy than Vodafone to me

This Fool said that he would wait for a dividend cut before venturing near Vodafone Group plc (LON:VOD). So, why isn’t he buying now?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Back in April, I remarked that I would continue to avoid buying shares in FTSE 100 communications giant Vodafone (LSE: VOD) until the clearly unsustainable dividend was reduced to a more sensible level.

Last week, this came to pass with new-ish CEO Nick Read announcing that the £33bn cap and income favourite would be slashing its payout to a total of 9 euro cents per share (7.9p) from the 15.07 euro cents (13p) paid last year.  

You can read more about Vodafone’s results for the year to the end of March in my Foolish colleague Harvey Jones’s piece from the day. So, will I now be piling in? Not yet.

Part of my reasoning behind this is simply because the stock hasn’t bounced as I thought it might.

Indeed, it would appear that many investors are continuing to dump the shares, perhaps more concerned by the fact that management believed only a few months ago that the dividend wouldn’t need to be cut, rather than by the eventual cut itself.

Certainly, this big U-turn doesn’t exactly inspire confidence and, in my opinion, devalues talk of adopting a progressive dividend policy from now on. Quite why Read — Vodafone’s former finance director — didn’t bite the bullet and elect to rebase it earlier this year still perplexes me. 

What’s more, I’m not over-the-moon regarding the extent to which the company’s new dividend will be covered by profits.

Cover of roughly 1.3 times earnings is clearly a huge improvement on where it used to be, but I can’t help thinking the 6.4% yield might still not be completely safe if market conditions worsen. 

News of a dividend cut may help in making Vodafone a slightly less risky buy but, with so much investment needed, so much debt on its books and such a competitive landscape (particularly in Spain and Italy), the share price needs to come down even further to really get me interested. 

A tastier alternative

An example of a dividend and growth stock I’m far more positive on would be FTSE 250 drinks giant Britvic (LSE: BVIC).

On the income side of things, the company has a long history of raising its cash payouts, albeit modestly.

This year, analysts are predicting a 4.5% increase to 29.5p per share, leaving the stock yielding 3.2%.

That’s clearly a lot less than Vodafone but, on the flip side, it is likely to be covered twice by profits. Moreover, dividend hikes are far more preferable to a supersized-but-stagnant yield, in my opinion. The former smacks of a company in rude health. The latter suggests an inevitable cut when the business cycle turns. 

Britvic also trades on a little under 16 times earnings, despite having already performed very well indeed over the last year or so.

A dip in profit growth is expected this year, but things are expected to rebound in 2020, helping to bring an already-reasonable valuation even lower, to a P/E of 15. 

That might not be as cheap as some other companies offering far higher yields, but its defensive qualities, strong brands (such as Robinsons, J2O and R Whites), consistently solid returns on capital employed and manageable debt levels make me far more likely to buy its shares. 

Britvic releases half-year figures to the market next Wednesday. I’d be surprised if there were anything for investors to worry about.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »