The Motley Fool

Two low-debt, income-generating FTSE 250 companies! Should I invest?

Rank Group (LSE:RNK) owns Mecca Bingo, Grosvenor Casinos, Enracha, and YoBingo and provides gaming services in the UK, Spain, and Belgium. 

Acquisition and merger

Since August, the Rank share price has risen a whopping 39%. This results from the successful acquisition of Stride Gaming, an increase of 10% in like-for-like revenues and overall better-than-expected Q1 results.

Sign up for FREE issues of The Motley Fool Collective. Do you want straightforward views on what’s happening with the stock market, direct to your inbox? Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio. Click here to get started now — it’s FREE!

The acquisition of Stride Gaming will complement Rank’s current offerings and help better place its digital operation as a multi-channel operator while delivering sustainable growth.

With this fast share price rise, the price-to-earnings (P/E) ratio has also skyrocketed and is now 32 times, up from 10.7 at the end of June. The FTSE 250 gambling operator offers a reasonable dividend yield of 3.2% and earnings per share are 7.4p. Its debt ratio is low at 18%. Cash has risen by approximately £3m to £25m since announcing the acquisition of Stride.

There is a lot to like about this share and I’m attracted by its potential for growth, defensive nature during economic downturns and that it seems to be making the right moves in securing a positive future. The high P/E ratio is less appealing but I still think there is value to be found in this share and I’d look to buy in a dip.

UK housing market

Crest Nicholson Holdings (LSE:CRST) builds homes in the UK. In its interim trading statement to 30 June, Crest stated it was moving out of expensive areas such as London and shifting focus to pre-selling homes and building in more affordable areas.

Crest Nicholson Regeneration is attempting to address the UK housing crisis by introducing build-to-rent properties in collaboration with local authorities. These are to target people who don’t qualify for housing benefit but equally can’t afford to step onto the property ladder. The homes are finished to a high standard in accessible and appealing locations.

In a traditional environment, the contractors wouldn’t look to redevelop the land because it wouldn’t be financially viable, but in this situation, the developer is ‘gifted’ the land, by the government, local authorities, or registered providers. Both parties benefit because the developer can create sought after homes at a reasonable cost and the provider gets to help with the housing crisis, while also making better use of and generating income from unused land.

Crest has a low P/E ratio of 7.8, and earnings per share are 55.7p, which is similar to a year prior when it was 55.4p. It offers a generous dividend with a yield of 7.6%, but cover is less than 2, so it may be at risk of future cuts if the UK construction sector continues to struggle.

The company has a low debt ratio of 26% but its operating margin is 15%. Low margins are vulnerable to inflation, which has been steadily affecting the cost of building a house, thanks to the pressures and unknowns of Brexit. This is unlikely to stop soon and may well get worse.

I think Crest has made a good move in shifting focus to building cash reserves and adapting its portfolio to address housing affordability. I’m tempted to buy Crest because its low P/E and high dividend are appealing, but third-quarter figures from the Purchasing Managers’ Index suggest the construction industry may be back in recession, which makes buying shares in the housebuilder risky. 

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy 6% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit!

Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”.

Click here to claim your copy of this special report now — free of charge!

Kirsteen has no position in any of the shares 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.