Staycation winner

The latest trading update from food-on-the-go baker/retailer Greggs (LSE: GRG) will be essential reading for me on 5 October. It’s one of the biggest single company positions in my Stocks and Shares ISA. 

Having likely benefited from UK staycations and high streets getting back to some semblance of normality, I’m confident whatever numbers are released will be encouraging. Recent signs that the company is keen to crack on with store openings over the rest of the year are surely bullish?

Of course, the risk with Greggs is that all of this is already priced in. A valuation of 29 times forecast earnings arguably doesn’t give new investors a massive margin of safety. Perhaps trading has moderated. Perhaps everyone has had their post-lockdown fill of sausage rolls for now.

No matter — I’m focused on the long term. If I do end up getting my call wrong, I’ll still use any dip as an opportunity to increase my holding further. 

Quality FTSE 250 retailer

Shares in homewares retailer Dunelm (LSE: DNLM) are up 74% over the last five years. That may not be as great a performance as that seen elsewhere in the index but it’s still a very decent return. For perspective, it’s well over double that achieved by the FTSE 250 as a whole (32%). 

Next month’s trading update, due on 14 October, could see further positive momentum. Despite its apparent lack of economic moat, a valuation of a little under 21 times earnings seems reasonable for a company that generates consistently great returns on the money it invests in itself. Any move upwards may also be exacerbated by the fact that Dunelm has a low free float. Only 55% or so of the company’s shares are actually traded.

Of course, a significant lurch downwards is also possible. Investors might also argue that Dunelm has already benefitted from the home improvement bug that set in over 2020 and could be about to slow.

Still, the 2.8% dividend yield is higher than the FTSE 250’s 1.8%. It also looks very secure, based on projected profits. 

Recovering strongly

Recruitment company Hays (LSE: HAS) is a third stock whose share price could rise in October. Like Dunelm, it’s down to release a trading update on 14 October.

Only last month, the FTSE 250 member said it now saw “a clear route back to, and then exceeding, pre-pandemic levels of profit” at a faster clip than previously expected. No wonder the share price has been on a roll.

I can’t imagine the outlook has changed for the worse over the last few weeks. Moreover, a PEG (price/earnings-to-growth) ratio of just one suggests investors could still get a lot of bang for their buck from the shares. A net cash position and the recent resumption of dividends further enhance the investment case.

Obviously, a jump in Covid infections could put a stop to this progress. With the colder weather approaching and more people being a little less vigilant than usual, this certainly can’t be dismissed. As always then, I need to ensure I was diversified in other sectors before pulling the trigger here.

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Paul Summers owns shares in Greggs. 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.

Still too dear?

When it comes to identifying great businesses, high-precision metrology and healthcare technology firm Renishaw (LSE: RSW) has regularly ticked a lot of the necessary boxes: high returns on capital employed, fat operating margins, a global leader in what it does with an experienced management.

Despite this, the company’s share price has certainly struggled of late, falling almost 40% in value from the highs hit back in January 2018 by the end of trading yesterday. 

Today’s trading update for the three months to the end of September hasn’t helped matters. Indeed, the stock was down another 12% as markets opened. So what’s going on?  

Put simply, Renishaw is continuing to feel the effects of reduced demand for its equipment. Revenue over the period was £124.6m — 19% lower than the £154m achieved over the same quarter in 2018. While last year’s number was helped by a few large orders from manufacturers in the Asia-Pacific region, this is still a significant drop. Pre-tax profit also fell a shocking 85%, from £33.5m over Q1 2018 to just £5.1m this time around.  

To make matters worse, there’s little sign of this malaise ending soon with the company reiterating its view that trading would “remain challenging” for the rest of the current financial year due to the uncertain economic conditions. All perfectly reasonable, of course, but not what its investors want to hear.

Renishaw’s stock was trading on almost 26 times forecast earnings before this morning. That’s punchy, even for such a quality outfit that still has net cash on its balance sheet (£98.5m), in addition to all its other attributes.

While a resolution to Brexit could see a brief recovery in many second-tier stocks, I’m not inclined to get involved just yet given this is still higher than its five-year average P/E of 23. One to come back to in 2020, I feel. 

Far more upbeat

Despite bearing similar hallmarks of quality (e.g. consistently high ROCE), shares in recruitment specialist Hays (LSE: HAS) — like those of Renishaw — have been under pressure for a while now. Go back a little over a year and the business was valued 46% more than it was at the close of play yesterday. By contrast to its index peer, however, today’s Q1 update was far more positive.

While group net fees fell by roughly 1% over the period — again blamed on “difficult economic conditions and tough growth comparatives” — 10 countries grew quarterly fees by over 10% and eight “still delivered all-time records“. Far from being gloomy on its outlook, CEO Alistair Cox also said he was confident the company’s strong market positions and finances (£90m in net cash) would allow the company to negotiate these tricky times while also investing for the future. Cue a 6% jump in the share price.

Shares were trading on 13 times forecast earnings earlier today — not unreasonable compared to its peer group and less than its average five-year P/E of 16. The 4.2% dividend yield might also be adequate compensation for some while they await a recovery.

The post Is this quality FTSE 250 growth stock a knife worth catching after today’s big fall? 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 recommended Renishaw. 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.

So, if you want to earn a better return on your money, you’re going to have to look elsewhere. One of the first places I think you should go looking for a higher return is the FTSE 250. 

Global income 

The first FTSE 250 income champion I think could be a great alternative to a Cash ISA is Hays (LSE: HAS). This global recruitment company has reported a surge in income over the past six years, with profits rising an average of 18% per annum since 2013. 

Hays has been able to profit from the booming global economy, which has lead to a spike in demand for skilled workers, the company’s specialism. Recruitment for the accountancy, finance, construction and information technology professions accounts for 51% of group net fees.

One of the great things about recruitment businesses like Hays is that they require very little in the way of capital spending, so they tend to highly cash generative. Hays is no exception. For the past five years, the company has reported an average return on capital employed — a measure of profitability for every £1 invested in the business — of 35%.

City analysts expect Hays to report a slight increase in earnings per share for fiscal 2019, and it looks as if the company is on track to meeting this target. In a trading update published today, management confirmed Hays’ full-year operating profit is expected to be in line with current consensus market expectations, even though overall group net fee income remained flat during the second quarter of 2019.

Cash generation also remains strong. The company ended the period with £130m of cash on the balance sheet, which should be more than enough to cover its dividend for the year. City analysts have the stock distributing 7.2p per share this year and 7.5p for 2020, giving a dividend yield of 5%. As well as this income, the stock trades at an attractive forward P/E of just 13.

Income growth

Another FTSE 250 income champion I’ve got my eyes on is Cineworld (LSE: CINE). I will admit, in the past, I’ve been sceptical about this company’s prospects. Its highly leveraged acquisition of US peer Regal left the group with a huge amount of debt, although it has nearly doubled net profit.

So far, the company seems to be progressing well with the deal, and my view of the business is starting to change. Earnings per share are expected to jump 18% for fiscal 2019, leaving the stock trading at a forward P/E 10.2. On top of this, analysts expect a 20% increase in the dividend yield, giving a yield of 5.4%.

These figures are attractive and, in my opinion, offset some of the risk associated with the high level of debt. The dividend is also covered 1.8 times by earnings per share, giving plenty of headroom to maintain the distribution while paying down debt at the same time.

Overall, if you are looking for a cheap FTSE 250 income play, I highly recommend taking a closer look at Cineworld, although due to its high level of borrowing, it might not be suitable for every investor.

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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.

In my eyes it’s the perfect panacea for investors seeking to protect themselves against the short-term turbulence created by Brexit and the possible long-term economic implications should a no-deal European Union withdrawal come to fruition. Don’t underestimate the stunning progress this FTSE 250 firm is making on foreign shores is my message, in particular in Germany and in its so-called Rest Of World operations (which also exclude Australia and the UK).

A globe-trotting great

Collectively, these divisions account for 60% of group net fees, units in which like-for-like revenues rose 6% and 9% in the three months to March, respectively. In total, Hays saw fees rise in excess of 10% in more than half of the 33 countries in which it trades in that period too. It’s no wonder that City analysts are expecting another year of decent earnings growth for the 12 months to June (by 10% to be exact).

A recent share price spurt (+11% since the start of this month) leaves Hays trading at levels not seen since the autumn, and I reckon next month’s trading statement will embolden investor appetite still further. A forward P/E ratio of 12.9 times suggests the recruiter remains quite undervalued, however, and this gives additional space for fresh bouts of buying.

One other thing. At current prices, Hays also carries a prospective dividend yield of 6.1%, adding another feather to its cap.

Good for your ‘elf

I’m also considering loading up on some Games Workshop Group (LSE: GAW) shares before numbers for the fiscal year ended May are disclosed.

It really has been a quarter to remember for the FTSE 250 firm, a leading light in the field of miniature wargaming. Its share price is up by a staggering 55% in the second quarter thus far, helped by the release of another solid update in early June in which it declared that sales and profits kept on chugging higher — and across all channels, too — since it informed the market a couple of months earlier.

Was anyone expecting anything different, though? I’ve lauded Games Workshop’s dominant position in a specialised retail segment, and one which commands fiercely-loyal legions of fans the world over, giving it some excellent protection during tough economic conditions. The fantasy giant is expanding its global footprint at a rate of knots, unsurprisingly, setting it up for some serious profits growth in the years ahead too.

For the moment, Games Workshop’s expected to print a 6% earnings rise in fiscal 2020 and to raise dividends again, resulting in an inflation-stripping 3.2% yield. I don’t care about its high forward P/E ratio of 24.6 times. In my mind, it’s a brilliant long-term income play to snap up today.

The post Dividend alert! 2 FTSE 250 income heroes I’m thinking of buying in July appeared first on The Motley Fool UK.

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Royston Wild 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.

Many of these medium-sized firms boast long and profitable trading histories, but are still expanding. Today I’m going to look at three dividend growth stocks from the FTSE 250 that I’ve been eyeballing for my own portfolio.

Smooth flying

Shares in engineering group Meggitt (LSE: MGGT) edged higher this morning after the firm reported underlying revenue growth of 9% for the first quarter. The firm’s business is split into three divisions, civil aerospace, defence and energy.

The largest of these is aerospace, which accounts for 54% of group revenue. The firm has operated in this sector for more than 80 years and says that “almost every jet airliner, regional aircraft and business jet in service” carries some of its equipment.

This dominant market share is a key attraction for me, especially as the firm’s defence business enjoys similar characteristics.

Although management warned today that air traffic growth could slow this year, it remains confident of delivering “strong revenue growth” with stable profit margins. The shares trade on about 15 times forecast earnings with a 3.4% dividend yield. That seems fair to me, given the group’s steady growth.

I suspect Meggitt will end up in the FTSE 100 in a few years. I see the shares as a long-term buy.

Recruitment success

Another FTSE 250 firm that’s impressed me recently is international recruitment group Hays (LSE: HAS). Its net fee income rose by 6% during the three months to 31 March, with like-for-like growth in all regions including the UK.

Chief executive Alistair Cox reported a “mixed economic backdrop across Europe” but said that the group’s main market of Germany grew by 6%. Elsewhere, Hays’ Australia and New Zealand business reported its 19th quarter of growth.

Although the future is uncertain, I think Hays’ size and geographical diversity should mean that it’s in a good position to cope with any regional slowdowns. In the meantime, profit margins are stable and cash generation remains very strong. Analysts expect earnings growth of 4%-6% per year in 2019 and 2020. With the shares offering a forecast yield of 4.6%, I think Hays remains worth buying.

A better buy than utilities?

Traditional utility stocks have been a poor investment in recent years. Several big names have cut their dividends and share price performance has been poor. The risk that utilities might be renationalised by a Labour government is also a concern.

If you’d like to invest in utilities but are looking for a safer choice, one company I’d consider is Telecom Plus (LSE: TEP), which trades under the Utility Warehouse brand. This business is a buying club that secures bulk-buy deals on energy, broadband and mobile which it resells to members.

Businesses of this kind aren’t always great investments. But Telecom Plus has been in business for more than 20 years and famously never advertises, relying on word-of-mouth and a network of agents. This approach has served the firm well. Sales have risen by 20% over the last five years. The group’s dividend has risen by 43% over the same period.

This business generates a lot of spare cash, most of which is returned to shareholders. The current dividend yield of 3.6% could be a good starting point. I’d buy.

The post 3 top FTSE 250 dividend stocks I’d buy right now appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.

The good news, though, is that this nosedive to three-month lows provides a great opportunity for dip buyers to nip in and grab a bargain — right now the FTSE 250 firm trades on a dirt-cheap forward P/E ratio of 12.4 times and it carries a gigantic 6.1% corresponding dividend yield too.

Look, the recruitment provider isn’t totally immune to the slowing German economy or tough construction markets in Australasia, and net fees growth dropped to 6% in the quarter ending March from 9% in the prior three months.

But there was still plenty to celebrate in the release last week. Net fee growth was still impressive considering the tough comparatives of a year earlier, and there was stunning progress in some of its other territories (including record quarterly results in eight of its markets).

A final shot: these Q3 results provided an extra nugget for income seekers to celebrate. Hays’ position as a cracking cash creator is well known and net cash swelled to £30m as of June, up from £5m a few months earlier and giving that little more beef to its progressive dividend policy.

Dividends still travelling higher

National  Express Group (LSE: NEX) is another dividend share I’ve long championed because of the booming profits it’s generating in foreign climes, progress which is due in no small part to its great track record of acquisitions.

So news that the transport operator was at it again this month by acquiring a majority stake in US-based employee shuttle company WeDriveU was fresh cause for celebration. The business serves some of Silicon Valley’s biggest companies and provides some excellent growth opportunities across the rest of North America.

City analysts certainly don’t expect National Express’s recent history of earnings growth to cease any time soon, and so dividends are anticipated to continue storming higher as well. For 2019, this results in a chunky 4% yield.

9% dividend yields!

If you’re looking for truly heart-stopping yields, though, you might want to check out Bovis Homes Group (LSE: BVS).

The size of the UK housing market’s supply and demand gap means that sales of new-builds should keep on tearing higher long into the future. The construction colossus is taking steps to boost its position in the social housing segment too, and this month entered a joint venture with Riverside to build a massive new development near Wellingborough, Northamptonshire, which will consist of more than 3,600 homes.

A bright profits outlook and the ability to also throw out shedloads of cash means that the homebuilder is dedicated to continuing to supply shareholders with special dividends, and this means that for 2019 the yield sits at a gargantuan 9.1%. At these levels I reckon Bovis is hard to overlook.

The post 3 FTSE 250 dividend kings I’d buy today and never sell appeared first on The Motley Fool UK.

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Royston Wild 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.

The brickmaker’s share price infamously took one hell of a whack last year because of forced production shutdowns. But improving sentiment towards the housebuilding sector has carried it higher since the turn of the year (up 30% from January 1, in fact).

Despite this uplift, the FTSE 250 firm still changes hands on a cheap forward P/E ratio of 13 times, comfortably inside the accepted value region of 15 times and below. This is mighty low given the company’s extremely bright earnings outlook, underpinned by the country’s cavernous housing shortage.

Indeed, the desperate need to get Britain building was underlined by the Chancellor Philip Hammond’s spring statement this week in which he vowed to establish an extra £3bn fund to help housing associations deliver an additional 30,000 affordable homes. And this adds to my belief that Ibstock’s bricks should keep selling like the proverbial hotcakes for many years to come.

Big yields!

Ibstock’s gigantic dividend yields of 5.1% for 2019 and 5.4% for 2020 provide more reasons to pay it close attention today. And if that whets your appetite, then Cairn Homes (LSE: CRN) is worth close attention too.

A 3.6% yield for the current fiscal year may be decent rather than spectacular, but thanks to City predictions of strong double-digit earnings rises over the next couple of years, a significantly higher dividend is forecast for 2020 and this yields an eye-popping 6.6%.

The supply crisis in Britain’s homes market is replicated across the Irish Sea, a situation that Cairn is well placed to exploit. The builder saw operating profit more than treble last year to €53.2m as it ramped up production to meet homebuyer demand in Dublin and other popular cities in Ireland. And it’s no wonder that the number crunchers are expecting the bottom line to keep swelling as construction rates rise (work is set to begin on five new selling sites in 2019 alone).

Another brilliant buy

At current share prices, Cairn can also be considered a bona-fide bargain, the firm boasting a prospective earnings multiple of a mere 5.8 times.

The final stock I’m looking at which offers the perfect blend of big dividends and great value is Hays (LSE: HAS). With City analysts expecting the recruiter’s long-running growth story to continue, it’s no surprise that dividends are expected to keep bulging too, meaning giant yields of 6% and 6.7% for fiscal 2019 and 2020 respectively.

And at recent trading levels, Hays boasts a forward P/E rating of just 12.8 times. Share pickers may be put off by continued weakness in its UK marketplace, but still-strong growth in key markets like Germany and Australia still offers plenty to cheer.

Indeed, Hays saw 20 of the 33 nations in which it operates print record performances in the six months to December. And as it invests to broaden its global footprint, I’m convinced that it should continue to thrive.

The post 3 embarrassingly cheap dividend stocks I’d buy with my last £1k appeared first on The Motley Fool UK.

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Royston Wild owns shares of Ibstock. 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.

Let me explain. Investing legend Warren Buffett famously said that “it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

What he meant, basically, was that it’s worth paying extra for quality. This is an argument that’s been used by Diageo fans for a long time. And I can’t argue with the results.

An investor who bought the stock seven years ago has seen the value of their shares double. During the same seven-year period, they’ve also received dividends worth about 24% of their original purchase price. That’s an impressive total return of about 124%.

Why won’t I buy?

Given this track record, I might be wrong to refuse to buy the shares today. But one thing I’ve noticed is that Diageo stock has got steadily more expensive over the last seven years.

In August 2012, the firm reported adjusted earnings of 94.2p per share. Based on the share price at the time, this valued the stock on about 18 times earnings.

Fast-forward to today, and the group’s accounts for the 12 months to 31 December show adjusted earnings of 127.8p per share. These figures price the stock at nearly 23 times earnings.

This isn’t an outrageous valuation. But it indicates that the shares only offer an earnings yield — a measure of profits compared to valuation — of about 5%. In my view, that’s quite low. I generally consider a figure of about 8% to represent good value.

History suggests that there will be times when the Diageo share price dips. This might be due to a market crash, or to short-term problems. This is when I hope to buy. In the meantime, I continue to rate the shares as a hold.

I’m tempted by this stock

One company whose valuation does seem attractive to me is FTSE 250 recruitment group Hays (LSE: HAS). Although it’s well known in the UK, this company also operates globally. Major markets include Australia and New Zealand, Germany, Canada, China and the USA.

With such a global footprint, it’s exposed to risks such as a US-China trade war. But Hays’ exposure to the risks of Brexit should be more easily contained. As it happens, the firm’s performance in the UK remains fairly solid. According to figures published on Thursday, net fees from the UK & Ireland rose by 3% during the second half of 2018. Operating profit from the region rose by 6%.

These figures were fairly weak compared with growth elsewhere. But I can live with that, given the current uncertainty facing UK businesses.

Good value at this level

Globally, Hays’ headcount of fee-earning recruitment consultants rose by 7% during the half-year period, with China, the USA and Canada each recording a 20% rise. Pre-tax profit rose by 6% to £122.6m and shareholders will receive an interim dividend of 1.11p, an increase of 5%.

Hays valuation looks tempting to me. The stock boasts an earnings yield of about 11% and offers a 4.5% dividend yield. That’s more in line with my idea of value. I’d consider the shares as a buy.

The post Why I’d avoid the Diageo share price and buy this FTSE 250 dividend stock appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

Small price, big dividends

House-building is one of the hottest sectors to grab a slice of right now. Newsflow from across the segment remains, broadly speaking, pretty exceptional, with supportive lending conditions driving strong buyer demand. And I’m expecting yet another solid update from MJ Gleeson (LSE: GLE) when it unfurls half-year results on Thursday, 14 February.

The firm sprung to three-month highs in early January when it declared “we continue to see strong demand for our low-cost homes,” and another fizzy update in the coming sessions could see it add more gains.

Gleeson’s dirt-cheap valuation currently leaves plenty of scope for another share price spurt. It trades on a forward P/E ratio of 12.3 times, comfortably below the regarded value benchmark of 15 times, and below. It also sports a corresponding, inflation-bursting 4% dividend yield.

The home-builders are very much back in fashion, illustrated by the fact that they now comprise three of the FTSE 100’s biggest risers over the past four weeks (with Taylor Wimpey leading the index, up 20%). Now seems a great time to pile in.

6% dividend yields

Hays (LSE: HAS) is another great stock I feel could surge on the release of interim numbers later this month (Thursday, 21 February).

Investors failed to significantly react to its second-quarter update in the middle of January, but I feel they missed a trick here. Last month, the recruitment ace advised that net fees exploded by double-digit percentages for many of its foreign territories during October-December, and this helped fees on a group level rise by a chunky 9%.

Concerns over Brexit are still doing the rounds and are likely to continue for some time yet. Extra signs of trading resilience from Hays, despite troubles in its home territory, could well fuel a fresh share price advance, though.

Its prospective P/E multiple of 12.4 times, and its smashing 6.3% dividend yield, certainly make it an attractive destination right now.

A FTSE 100 favourite

Smurfit Kappa Group (LSE: SKG) is a company I believe is long overdue a share price bounce. I reckon this could finally occur when full-year results are released on Wednesday, 13 February.

I’ve been arguing that market sentiment towards the packaging sector, spurred by concerns over new capacity hitting the market, has been far too bearish. I believe that signs of more progress from the Footsie firm on the trading front should help allay these concerns and help it to recover some more ground. Last time out in October, Smurfit Kappa declared it “experienced continued demand growth across most markets” during January-September and tipped further gains as growing environmental concerns drive sales of its corrugated products.

A prospective earnings multiple of 8.8 times leaves oodles of room for a fresh re-rating, in my opinion, as does a bulging 3.9% dividend yield. I think next week’s release could prove the catalyst for a share price fightback in 2019.

The post 3 top dividend stocks I’d buy for February (and for 2019) appeared first on The Motley Fool UK.

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Royston Wild owns shares of Taylor Wimpey. 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.

I’d been concerned about the way the shares seemed to be over-valuing Vodafone for some time. Yet the firm has maintained its dividend over the past few years and the yield is big at around 9%. But there’s no sign of a dividend rise on the horizon, and I like to see a dividend rising a little every year with my investments. Indeed, earnings haven’t covered the dividend payment for some time, but cash inflow just about covers it.

However, Vodafone carries a big load of debt, which needs to be serviced. The money to pay interest on borrowings comes from the same cash inflow that pays the dividend, so there’s competition for the limited amount of cash that flows into the business.

Competition and restructuring

There’s also competition in the market for the type of service Vodafone provides, and the firm mentioned it in the recent half-year report. A new chief executive has switched the firm into what looks like turnaround mode, with cost-cutting initiatives, restructuring, and the like. I reckon the dividend could fall into focus and become vulnerable. So, with the shares falling, I’d watch from the sidelines and would be more inclined to invest in Hays (LSE: HAS) instead.

The recruitment company’s second-quarter update today revealed good trading in all the operating geographies. Overall, like-for-like net fees grew 9% for the three months to 31 December, driven by a strong performance from the company’s extensive international business.

Hays carries a net cash position rather than the big debt-load burdening Vodafone, and I reckon that situation will help the company maintain its chunky dividend payments over the coming years. The firm has a good record of raising the dividend payment a little each year, which I find encouraging.

Cyclical, but trading well

The recruitment sector is known for its cyclicality and you can see in the share-price chart how the stock plunges and rises according to prevailing economic fears of the day. But, over the past six years or so, earnings, revenues and the dividend have been on a steady upward trajectory, with no sign of a wobble. Indeed, City analysts predict robust trading ahead. Meanwhile, chief executive Alistair Cox said in the report “the outlook is good across most International markets.”

On balance, I’d rather risk my capital on Hays than on Vodafone and I’d aim to buy some of its shares when the price had cycled down, such as now. As said, the firm’s operations are cyclical, but the enterprise is growing too. And the dividend income would be useful to collect while holding the shares and waiting for operational progress to deliver capital growth from a higher share price.

The post Why I’d shun the Vodafone share price and buy this stock instead appeared first on The Motley Fool UK.

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Kevin Godbold 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.