FTSE 250 wealth-builder

IT services provider FDM Group (LSE: FDM) is unlikely to make headlines. The company recruits and trains graduates, ex-services personnel and those wanting to return to work in technical skills. In return for this instruction, FDM’s consultants — otherwise known as Mounties — then work for the £1.2bn cap for a minimum of two years. 

From an investment perspective, this business model was never going to compete with glitzy tech stocks whose share prices have shot the lights out over the pandemic. Nevertheless, anyone buying FDM’s stock in March 2020 will have seen their holding more than double in value. That’s a superb return. It’s also far better than the 33% or so seen in the FTSE 250 as a whole.

The shares are rising again today following the release of FDM’s latest set of interim results. 

Rising demand

Revenue may have fallen 7% to £131.3m over the first six months of 2021, but it’s important to put this in context. FDM had a great Q1 before Covid-19 arrived in 2020. This means that the number of Mounties being deployed so far in 2021 always had the potential to be lower. 

Moreover, some regions seem to be doing better than others. Collectively, revenue growth of 15% was logged for Europe, the Middle East and Africa. In the Asia Pacific region, a 24% jump was seen. On the flipside, demand in the US had been “more subdued“. 

Pre-tax profit fell 3% to £20.5m. That said, the latter was actually 9% higher (at £22m) on an adjusted basis.

Perhaps most tellingly, the FTSE 250 member stated that it had significantly increased recruitment and training levels over the first six months of 2021 to meet demand. As a potential investor in a forward-looking market, this is the sort of signal I’m hunting for. I also like the fact that 31 of 37 new clients come from outside of financial services, helping to diversify earnings across sectors.  

Frothy valuation

Signing off today’s statement, CEO Rob Flavell said that FDM was “well placed” to hit expectations for its full year. This suggests there could be further upside to the FDM share price, especially if operations in the US bounce back to form. 

For balance, however, it’s worth considering a few risks.

One that jumps out at me is the current valuation. Before markets opened this morning, FDM shares were trading on a heady forward earnings multiple of 36. Now, I think the company’s consistently high returns on capital and margins go some way to supporting this. FDM also boasts a solid balance sheet, which is more than you can say for some stocks in the FTSE 250.

Even so, I can’t deny that the recovery in business looks pretty priced in. And as Boris Johnson continually stresses, we’re not in the clear just yet. Any disappointing results could send the shares downwards.

Watchlist addition

I doubt this FDM will ever set the market on fire. Assuming I wasn’t attempting to grow my portfolio at a faster clip at potentially greater risk, however, I’m inclined to regard FDM as a decent addition to a suitably diversified portfolio.

For now, it stays on my watchlist until a potentially better entry point appears.

The post Is this FTSE 250 stock a brilliant under-the-radar buy? appeared first on The Motley Fool UK.

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Paul Summers 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.

Looking ahead, there could be more pain for investors in the company. Its strategy seems to be struggling to gain traction in an increasingly competitive quad-play industry. Therefore, it could be worth selling in order to buy another income stock which may have passed under the radar of many investors.

Declining profitability

In the current year, BT is expected to report a fall in its bottom line of 6%. This follows last year’s drop in profitability of 9% and shows that the company is experiencing a difficult period at the present time. Despite this, it continues to increase dividend payments on a per share basis. For example, they are expected to be over 11% higher this year than they were two years ago. This suggests that the company’s dividend affordability is declining.

In fact, BT’s dividend coverage is due to fall to 1.7 times in the current year from 2.3 times in 2016. Although its current coverage ratio may be relatively high when compared to some of its index peers, the stock lacks earnings growth potential. It is due to report a rise in earnings of 3% next year, followed by growth of 1% in the following year. This could mean that the pace of dividend growth slows down dramatically.

Furthermore, with pension costs and investment for future growth continuing to be a drain on its cash resources, dividends may become less of a priority for the company. As such, it appears to be a stock to avoid from an income perspective.

Impressive outlook

One stock which could be worth buying for its income prospects is global professional services provider to the information technology industry FDM Group (LSE: FDM). It released results for the 2017 financial year on Wednesday which showed that it has delivered strong operational and financial progress. Its revenue increased by 23%, while profit before tax moved 26% higher on an adjusted basis. This allowed it to increase dividends per share by 33%, which puts it on a dividend yield of 2.5%.

Looking ahead, FDM is expected to deliver a rise in dividends of 10% per annum during the next two years. This means it could offer an inflation-beating yield over the medium term. This could boost investor sentiment in the stock – especially since its earnings growth rate is set to be high. Over the next two years its bottom line is forecast to increase by around 9% per annum, which suggests that a double-digit dividend rise could be very affordable for the business. As such, it could be an attractive dividend stock.

The post Why I’d sell BT Group plc to buy this hidden dividend stock appeared first on The Motley Fool UK.

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Peter Stephens has no position in any 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.