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2 FTSE 250 growth and income stocks I’d buy for my 2020 ISA

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After a three-year slide, Rank Group (LSE: RNK) shares turned upwards again last summer. The company had been suffering from stagnating earnings as gaming revenues shifted online, but Rank is joining the turning tide.

Analysts are now expecting a 35% resurgence in earnings this year, with accelerating dividend growth. The result has been a 90% share price gain over the past 12 months. I think there’s more to come.

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First half results delivered Thursday underscore what I see as an impressive transformation, with a shift towards online delivery. While total underlying net gaming revenue (NGR) rose by 10.3%, digital revenue surged 13.8%. NGR from traditional venues rose 9.5%, though it still makes up the bulk.

Profit

The bottom line appears to be soaring, with underlying operating profit up 87% to £59.8m. Underlying pre-tax profit is up 73% to £52.9m. That supports analysts’ pre-tax consensus of £97m for the full year, and I think Rank could do even better than that.

Rank showed modest underlying net debt of £59m, from net cash of £7.7m a year previously, but still raised its dividend by 30%. Statutory net debt reached £300.5m though, so I’d need to examine the difference more closely before I’d buy.

We’re looking at a forward P/E of around 14.5, dropping to 12.8 on 2021 forecasts. I’m not sure that alone provides the safety I’d need, and the gaming business can be volatile. But further growth beyond 2021, plus continued progressive dividends, would assuage that fear.

There’s a bit more investigation needed, but Rank is definitely a ‘buy’ candidate for me.

Climbing

Brexit might have kicked the stuffing out of the housebuilding business, and a no-deal dumping could have hit even harder. But sooner or later (and hopefully it’s sooner now), we’ll be over the economic effects. And we’ll still be facing a deep and chronic housing shortage.

As a result, I’ve been persistently bullish over the sector, and I think Redrow (LSE: RDW) could be in for a winning decade.

Redrow shares have been climbing since December and are now up 31% over 12 months. They’re also up 158% over five years. But Redrow has looked perpetually undervalued compared to the sector. And even after that strong price performance, the shares are on a P/E of only 8.6.

Taylor Wimpey shares, by contrast, command a P/E of 11, and fellow FTSE 250 builder Crest Nicholson is on a multiple of more than 12. Redrow’s expected dividend yields are lower than those two, and that probably explains the valuation difference.

Dividends

The City is expecting 3.9% this year, which is perhaps unexciting, but still represents a five-fold dividend rise in five years. A further uplift suggested for 2021 would elevate the yield to 5.5%, which would be more than twice covered by earnings.

2019 brought record pre-tax profit for Redrow, with very strong cash generation of £124m (from £63m in 2018). And though earnings are expected to flatten over the next couple of years, I see a long-term cash cow here.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. 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.

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