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£1k to invest? I’d avoid the Royal Mail share price and buy this dividend hero instead

Regular readers will know that I am not a fan of the Royal Mail (LSE: RMG) share price. I think the company’s lack of growth, high level of borrowing and capital spending requirements are all red flags. And although I’ve recently turned positive on the stock, I think there are plenty of other better investment opportunities out there.

One of these opportunities that I think it could be an excellent investment if you have just £1,000 is Bloomsbury Publishing (LSE: BMY)

Cash cow

Bloomsbury’s most famous publications are the Harry Potter novels, but this is much more than just a one-trick pony. The company operates four publishing divisions, adult, children’s and educational, academic and professional, and information. 

Even though J.K. Rowling’s books continue to provide a steady stream of income for the group, other non-fiction publications, such as Three Women by Lisa Taddeo, have reached the bestseller lists. Cookbooks by TV chef Tom Kerridge, have also been”significant titles” for Bloomsbury over the past two years.

It is also investing in its digital offering. Last month, Bloomsbury announced a partnership with the National Theatre, enhancing the profile of its “award-winning Drama Online platform,” a digital library for the acting profession.

As Bloomsbury continues to push out titles and invest in its digital offering, City analysts expect earnings per share to jump 26% this year to 16.2p. According to a trading update issued by the business today, management believes the company is well on the way to meeting this target, which puts the stock on a forward P/E of 14.4.

On top of this, shares in Bloomsbury support a dividend yield of 3.6%. The payout is covered twice by earnings per share and backed up by £28m of cash on the balance sheet, enough to sustain the dividend for more than four years according to my calculations.

Mixed outlook

In comparison to Bloomsbury, Royal Mail looks to me to be a bit of a basket case. Shares in the postal service are cheaper than those of Bloomsbury, trading at a forward P/E of just 8.9, but they are cheap for a reason.

City analysts have pencilled in a 49% decline in earnings per share for the company’s 2020 financial year, and they don’t expect earnings to snap back in the following year either. As well as falling earnings, Royal Mail’s dividend is set to contract by a third in the current financial year. There’s a chance the firm will have to reduce its payout further in the years ahead as well.

Management wants to spend £1.8bn over the next five years to try to reinvent Royal Mail for the 21st century, investing more money in the parcels division and improving operational efficiency. According to reports, this investment is badly needed, but it will reduce the amount of cash that is available for distribution to investors. The payout is only covered 1.4 times by earnings per share, which does not give the company much headroom if earnings suddenly lurch lower again.

The bottom line 

So overall, compared to Royal Mail, Bloomsbury looks to be a much better investment. Not only is the company growing rapidly, but it also has a strong balance sheet, attractive dividend credentials and owns the rights to some of the most popular books sold over the past 20 years.

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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.