The Motley Fool

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

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.

Image source: Getty Images.

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.  

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...

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.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his 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 click below to discover how you can take advantage of this.