What happens next?

Here’s the bad news. Whether markets continue their downward descent in March is pretty much impossible to say. There are simply too many variables involved.

This being the case, it’s vital to separate signal from noise and only use the former to our advantage. In other words, investors need only concentrate on what they know or can control.

What we do know is that markets have always recovered over time… it’s individual companies that don’t. This being the case, it’s surely far more productive to look for high-quality businesses to buy on temporary weakness than it is to fret over whether global markets rise or fall on Monday.  

What do the best UK shares look like?

It’s subjective, of course. Nevertheless, I look to separate the wheat from the chaff using the following checklist. I want companies I invest in to:

• Solve a problem (if it doesn’t, why would anyone buy what it sells?)
• Be profitable (companies actually making money will always be more resilient than those dependent on hype)
• Offer multiple products (one-product companies are risky if fashion/demand changes)
• Generate repeat business (thus allowing me to be more confident on earnings)
• Have low/no debt (allowing a business to survive an inevitable crisis or two)
• Have great returns on capital (it makes lots of money from the cash it invests in itself)

Although there’s no such thing as a perfect company, many of my personal holdings tick many of these boxes. This explains why I’m invested in drinks firm AG Barr, laser-equipment supplier Somero Enterprises, kettle safety firm Strix and comparison website Moneysupermarket.com.  

Slow and steady

Buying even the best UK shares at a time when markets are falling takes guts. This fact is obvious when all is well but it can be hard to remember when the chips are down. 

I’m as susceptible to fear and greed as anyone else. In an effort to counter this, I think the most appropriate response is to adopt a ‘slow and steady’ approach. In practice, this means investing my money gradually. I may not be able to time my purchases perfectly but I’ve never met someone who can. The danger of trying is that the recovery happens before putting any capital to work. Ultimately, I may end up paying more than I wanted to. 

A slow and steady approach isn’t perfect. In theory, the more times I buy, the more commission I will incur. This is a problem since costs can have a huge impact on a portfolio’s performance over time, regardless of how good the actual investments are. One way I work around this is to take advantage of ‘regular investing’ plans that buy on the same date each month, vastly reducing what I pay.

Ignoring the noise, finding the best  UK shares to buy and keeping costs low is no guarantee of success, but it’s how I’m handling this latest market crash. 

The post Why I think NOW might be a great time to buy the best UK shares appeared first on The Motley Fool UK.

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Paul Summers owns shares of AG Barr, Moneysupermarket.com, Somero Enterprises, Inc. and Strix Group. The Motley Fool UK has recommended AG Barr, Moneysupermarket.com, and Somero Enterprises, Inc. 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.

Moneysupermarket

It has gone into sharp reverse today with the share price crashing 10% after a disappointing, but hardly disastrous, Q3 trading statement. The site’s current motto is Get Money Calm, but today investors are in a selling frenzy. This could be an opportunity for those who believe in the group’s longer-term prospects. 

Today’s update was bullishly headlined “Revenue grows 4% as energy outperforms”, but investors chose to focus on less impressive numbers, primarily the 5% drop in revenues from its Money division to £20.6m.

Quarterly revenues from Home Services (which includes energy) compensated by growing a healthy 21% to £17.7m, but this slowed from 40% growth when measured over the nine months to 30 September.

Revenue growth in its Insurance division, which accounts for half of all sales, remained solid at 3% to £49.9m, despite the “subdued premium environment”. CEO Mark Lewis warned that although overall trading dynamics should continue to the end of the year, Money will “weaken”. However, the board remains confident of meeting full-year market expectations.

There were signs of a slowdown in July, when I warned the group has to keep growing fast to justify its toppy valuation of 22 times forecast earnings. Today it still looks pricey at 21.4 times forward earnings, with a price-to-revenue ratio of 5.3. City analysts remain optimistic, suggesting earnings will rise 4% this year and 9% next, when the dividend will hit 3.3%.

Moneysupermarket has a strong brand and mobile functionality, and the over-crowded market has been whittled down to just four major competitors: Compare the Market, Confused.com, GoCompare and uSwitch. The stock may still tempt, but given today’s pricey valuation you might want to look elsewhere in the FTSE 250.

GoCompare

GoCo Group (LSE: GOCO) has been flying lately, its share price jumping 16% in the last week (30% over the month), despite July’s interims showing year-on-year revenue growth of just 0.3% to £76m.

Its numbers show the difficulty of competing in this market, with price comparison revenues flat and car insurance conversion of just 1.2 percentage points, “broadly offsetting marketing inflation in a competitive market”.

GoCompare has been looking to drive growth – or at least maintain its market position – with new services such as WeFlip, and the recent acquisition of the Look After My Bills service, which has more than 150,000 live customers, for £12.5m.

The group is keen to stress its “disciplined financial performance”, essential in such a competitive market, and is looking to add a new revenue stream by developing proprietary technology platform SaveStack, striking a recent partnership with CYBG/Virgin Money.

Again, GoCompare looks pricey 21.1 times forward earnings, given low growth prospects and a forecast yield of just 1.4%. Investors have been piling in lately, but this remains a tough sector to make money in.

The post This FTSE 250 high flier is down 10% today! Here’s what I’d do right now appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. 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.

Growing business

Goodwin is a metalworking business operating through two segments, mechanical engineering and refractory engineering. Put simply, the company manufactures and machines metal parts for customers.

Despite the uncertain economic environment, business is booming across the enterprise.

According to Goodwin’s preliminary results for the year ended 30 April, the forward order book stands at a “record” £165m, an increase of 94% year-on-year. On top of this, the firm has several “large long-term contracts” that are still to be placed. All in all, pre-tax profit increased 11% for the year to £14.7m and revenues rose 1.8%.

Goodwin might be a relatively small business with a market capitalisation of £250m at the time of writing, but don’t let this size deceive you. The company has a global footprint and added businesses in China and Thailand to the group during its last financial year. Just 22% of total sales came from the UK last year.

Over the past five years, as the firm has reinvested profits back into the business to drive growth, book value has risen at a compound annual rate of 11.3%. I think this growth is a testament to the company’s ability to create value for shareholders.

At the time of writing, shares in the group are dealing at a historical P/E of 21.4, which, in my opinion, is not too demanding considering Goodwin’s order book and record of creating value for investors. It also supports a dividend yield of 2.5%.

Brand power

I also reckon Moneysupermarket.Com (LSE: MONY) could be an excellent addition for a retirement portfolio.

What I like about this company is its market-leading brand. There are only really three major price comparison websites in the UK, and Moneysupermarket is one of them. Consumers know and trust the brand, and brands also trust the business to provide customers.

The company’s market-leading position means that it can generate fantastic profit margins. Last year, Moneysupermarket’s operating profit margin clocked in at 30.4%. Return on capital employed — a measure of profitability for every £1 invested in the business — hit 50%.

However, despite this profitability, shares in Moneysupermarket are only changing hands at a forward P/E of 20, falling to 18.4 in 2020 based on current City estimates for growth. Considering the company’s profitability, I believe the shares are worth around 25% more than the current price, which would give a P/E of 25. That’s without factoring in any future growth.

I think Moneysupermarket has the potential to grow earnings at a high single-digit rate for many years to come as more and more consumers turn to the business for money-saving deals, and management uses excess cash for acquisitions. On top of this growth, the stock currently supports a dividend yield of 3.1%.

The post Two stocks I’d buy today to retire on appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Goodwin and Moneysupermarket.com. 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 the Money

But it had to slow at some point, and that moment is now. The stock was down 3% on publication of its group interim results for the six months to 30 June, despite a positive set of numbers with group revenue up 15% to £199.4, “driven by exceptional energy switching.”

Profit after tax rose 18% to £50.2m, while “strong” operating cash flows jumped 20% to £51.4m. In fact, the only negative figure I can find is a rise in net debt, with last year’s net cash position of £24.4m turning negative at £12.6m.

As Roland Head recently pointed out, management is investing its plentiful cashflows on next generation of services to boost automated switching and tighten customer relationships, and this could be money well spent. Given that the FTSE 250 stock now has a market-cap of more than £2bn, I can’t get too worried about it. 

Reinvent that

I can only assume the downbeat market response is because the group has to keep growing fast to justify today’s toppy valuation of 22 times forecast earning. CEO Mark Lewis is still confident of delivering market expectations for the year and hailed the success of the group’s Reinvent strategy. The interim dividend was increased 5%, reflecting a progressive policy which puts the forecast yield at 3.5%.

The group distributed £83.4m wealth of dividends during the period, including a £40m special divi announced in February, up from £40.7m last year. City earnings projections look positive at 6% and 8% for the next couple of years and, with cash-strapped Britons still keen on switching, the Moneysupermarket share price may continue to reap the rewards, especially if the Reinvent strategy bears further fruit. 

Compare and contrast

It’s interesting to compare the Moneysupermarket stock with rival GoCompare.com Group (LSE: GOCO), a relative minnow with a market-cap of just £357m. The home of Gio Compario has been out of favour with investors and is down nearly a third over the past year. But lately, there’s been signs of life, with a 20% pick-up in the last six months.

Inevitably, it’s cheaper than Moneysupermarket, trading at 14.6 times forward earnings. However, earnings prospects look more volatile with a 25% drop forecast for 2019, followed by growth of 22% in 2020. The forecast dividend is less generous at 2.1%.

GOCO for it

Lower expectations could work in favour of the GoCompare share price, offering it more scope for uplift. Last year’s operating profit margins of 24.7% were strong, while its return on capital employed was a thumping 105%. It’s also looking to drive customer numbers with its ‘weflip’ regular energy switching service.

Investors have woken up to the opportunity, but there could be further growth to come. Do you favour Moneysupermarket’s momentum, or GoCompare’s recovery potential? It’s a tough comparison, but I’d buy either rather than leave my money in a Cash ISA paying 1% or less.

The post Forget the Cash ISA! I’d rather buy these 2 FTSE 250 income and growth stocks appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. 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.

Strategic reinvention

Some of the gloss has come off the price comparison sector in recent years as early rapid growth slowed amid tough competition and market saturation. However, Moneysupermarket’s ‘reinvent strategy’ appears to be paying off as it targets  automated switching and tighter customer relationships in a bid to drive up repeat income.

Today CEO Mark Lewis said the strategy has delivered new branding and advertising “to remind everyone how we can help them with their finances and ‘get money calm’ “, helped by new products such as Credit Monitor.

Money motoring

Motor insurance is a key market and conversion numbers were up, partially offset by subdued trading in life insurance as competitors spent more on customer incentives, so overall total insurance revenues only grew 3% to £48.3m.

Revenues from its money services such as banking grew 9% to £25.3m, against a weak comparative quarter in 2018. Gas and electricity switching was particularly strong, due to attractive offers and the rapid jump in the new energy price cap.

Special dividend

Home services revenues (which include energy) grew 70% to £19.6m with total group revenues up 19% to £104.9m. Lewis warned that “exceptional” home services performance will moderate, but the outlook remains unchanged with the board confident of meeting expectations.

In February, the £2bn group proposed an enhanced £40m distribution, which today it confirmed will be made by way of a special dividend of 7.46p per share to be paid on 21 May, to shareholders on the register on 3 May.

Moneysupermarket now trades at a relatively pricey 20 times earnings and 4.9 times revenues. The forecast dividend is 3.8% with cover of 1.4. Earnings per share are forecast to grow 9% and 6% over the next couple of years and the group will have to avoid stumbles to justify its current valuation.

Compare and contrast

I thought it would be interesting to compare it with smaller rival Gocompare.com Group (LSE: GOCO). Also listed on the FTSE 250, this has a market cap of just £336bn. Last year it suffered a pretty calamitous crash, but is up almost 20% in the past month, boosted by news that chairman Peter Wood, who founded Direct Line, Esure and Sheila’s Wheels, has loaded up on 17.8m shares, lifting his total holding from 25.6% to 29.9%.

This was a real vote of confidence and led to speculation that he might even take GoCompare private. It is publicly traded for now and in contrast to Moneysupermarket still looks a relative bargain trading at 12.7 times earnings, and 2.3 times revenues. The forecast yield is just 1.9%, though, but covered four times.

GoCo is investing £10m in promoting its new regular energy switching service weflip, which also aims to drive repeat revenues, while full-year revenues showed adjusted operating profit up 22.2% to £44m, and adjusted basic earnings per share 20% higher at 7.8p. After a tough time, the price comparison sector could be worth a closer look again.

The post I can see a strong case for buying both these FTSE 250 dividend and growth stocks today appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. 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.

Here in the UK, technology stars such as Rightmove and AVEVA may have grown more slowly, but shares in both companies have still doubled over the last five years.

Today, I want to look at two other UK-listed tech stocks for which many investors have big hopes. Could investing in either help you become an ISA millionaire?

I’d buy this cash machine

One of my top picks in the domestic technology sector is Moneysupermarket.com Group (LSE: MONY). The market-leading price comparison website needs no introduction. However, I suspect many website users don’t realise just how profitable this business is.

In 2018, it generated a return on capital employed of 50%. What this means is that the group’s operating profit of £108m represented 50% of the money tied up in the business. That’s an outstanding result, because it shows the firm is able to generate very high returns when it invests surplus cash in growth opportunities.

Management is currently spending some of this cash on developing a new generation of services. From what I can tell, these will provide higher levels of automated switching and tighten the relationship between the customer and Moneysupermarket.

I expect these changes to improve the firm’s ability to generate repeat income from customers — good news.

My view: Moneysupermarket.com shares have risen by more 25% in 2019. They now trade on 19 times forecast earnings, with a 4% dividend yield. In my view, this very profitable business is the kind of investment that could help you build a million-pound ISA. I’d keep buying.

Bargain buy or value trap?

My next stock is a more speculative choice. Taptica International (LSE: TAP) is an online marketing specialist that makes money by providing targeted advertising for brands through video and other channels.

Shares in the Israeli firm have fallen by about 55% over the last year. The majority of this decline has happened since December when former chief executive Hagai Tal resigned in connection with an alleged fraud at his previous company.

Although there’s no suggestion that anything’s wrong at Taptica, investors are understandably wary, given the group’s non-UK domicile and lack of leadership. Increasing uncertainty about the outlook for growth hasn’t helped either.

Today’s 2018 results do little to answer the questions faced by the firm. Revenue rose by 31% to $276.9m last year, while pre-tax profit rose by 57% to $27.2m.

The group ended the year with net cash of $54.4m and management reiterated plans to buyback $15m of shares, after the takeover of video advertising group RhythmOne has completed. Despite such strong figures, Taptica’s share price is only 2% higher at the time of writing.

What’s wrong?

RhythmOne was also hit by allegations of misconduct a few years ago and has struggled to recover. Although a profit is expected for 2019, it has reported a loss every year since 2015.

Taptica hopes to create a market-leading digital advertising business by combing its operations with those of RhythmOne.

My view: But shares in both firms currently trade on less than six times 2019 forecast earnings. This tells me the market is pricing in a lot of risk. That’s a view I share. So both Taptica International and RhythmOne are too speculative for me.

The post Could this tech sector stock help you become an ISA millionaire? appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and Netflix. The Motley Fool UK has recommended Moneysupermarket.com and Rightmove. 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’ve been a fan of the stock for years, although even I have to admit that share price growth has disappointed lately.

On the Money

I’m also interested in comparison site Moneysupermarket.com (LSE: MONY), whose stock is up 5% today after it announced 8% revenue growth in its preliminary results for the year ended 31 December.

After the initial surge in investor interest, which saw the site’s share price grow five-fold in as many years to top 370p in summer 2015, it’s been idling, amid fears Amazon might launch its own insurance comparison site. Even after today’s jump, it only trades at 326p, the same level as three years ago. 

Shareholder rewards

Today brought good news, though. Moneysupermarket delivered record levels of switching and helped its customers save an estimated £2.1bn, while adjusted EBITDA of £129.4m was in line with expectations. It also reported “strong cash generation” of £106.6m during the period, while making significant progress in executing its strategy to reaccelerate core growth and unlock new markets.

It rewarded loyal investors too, announcing plans to return an additional £40m to shareholders in 2019, in line with its capital allocation policy. It also hiked the total dividend by 6%.

Beyond compare

Group CEO Mark Lewis said the group is reinventing itself and “taking price comparison to the next stage.” The board is confident of delivering market expectations for the year, with trading in the first six weeks “encouraging.”

Moneysupermarket trades at 16.9 times forward earnings, so there’s no bargain valuation here. A price-to-revenue ratio of 4.4 is also a bit high. However, the forecast yield is 3.8% and, as we have seen, management’s dividend policy is progressive. Meanwhile, operating margins of 32.6% and return on capital employed (ROCE) of a whopping 257.3%, look splendid. My worry is that it’s in a competitive market, although revenues look set to grow 7% this year, and 9% next. Overall, Moneysupermarket compares pretty well.

Life style

So to Aviva. It currently offers a whopping forecast yield of 7.8%, which you can take tax free inside an ISA, while cover stands at a healthy 1.8. That’s not the only reason to buy it. As Roland Head points out, management has fulfilled its promises by boosting cash flow, repaying debt, tightening focus, and offering a rising stream of dividends.

City analysts reckon the dividends will keep flowing, rising from 30.23p in 2018 to 37.34p in 2020. That’s a leap of 23.5% in a couple of years. If it happens, it’ll lift the yield to 8.9%. This is a lousy time to be a saver, but a golden age for dividend investors.

Big is beautiful

Aviva’s earnings looks set to grow 6% in 1919 and 7% in 2020, which should sustain the share price. It currently trades at a dirt-cheap 6.8 times forward earnings. ROCE of just 8.5% looks a bit stodgy (investors prefer 15% and above), but the high dividend and valuation make a compelling case.

The post The Aviva share price may be a great buy for this year’s stocks and shares ISA appeared first on The Motley Fool UK.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. 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.

BARC and bite

Some might see this as a sign to walk away, but others might spot a contrarian buying opportunity. I’m in the latter camp, although it’s been lonely here lately, with Barclays (LSE: BARC) down 20% in the last six months as investors fret about the impact of rising interest rates and a slowing economy on the sector.

It didn’t help that Barclays announced a 29% fall in first-half profit before tax to £1.66bn, largely down to conduct and litigation costs totalling £2bn. However, once you exclude those costs, profits before tax rose 20% to £3.7bn.

Bank on it

There could be more penalties to come, with the SFO now taking its case over dealings with Qatari investors in 2008 to the High Court. Barclays is far from perfect, but herein lies the opportunity. It is trading at a lowly price-to-book value of just 0.4 and price/earnings ratio of just 8.4 times forecast earnings, roughly half the levels seen as fair valuation.

These stats confirm my view that Barclays is under-appreciated. Investors are wary of the banks generally, as noise grows surrounding the prospect of another financial meltdown. The banks would be in the firing line if that happened although less so than last time, given all that hard work hard building their capital cushions.

Barclays looks cheap today, and the income looks good tomorrow. It is slowly restoring its dividend and currently yields 3.8% (covered 3.2 times) and this is forecast to hit 4.7% next year. My Foolish colleague Peter Stephens tips it as a real dividend grower.

Off the Money

Moneysupermarket.com (LSE: MONY) has failed to match up to comparisons lately, its share price falling 17% in the last year. It is down 2% today after its Q3 trading update reported respectable revenue growth of 7% to £96.4m over the quarter, or 6% year-on-year.

While not bad, it operates in a challenging market, with its key Insurance arm, which contributes half of revenues, rising an underwhelming 2%, amid a falling premium cycle. CEO Mark Lewis reported continuing positive momentum in its Money division, supported by attractive products and improving conversion, and said switching rates in Energy remained strong against tough comparatives.

Big trouble

Moneysupermarket is on course to meet expectations but those expectations are lower than in the glory days, when price comparison sites were a novelty. This is a competitive sector, and although it has brand visibility, others are snapping at its heels.

It is also at the mercy of Amazon, rumoured to be planning its own insurance comparison site. City analysts predict a 1% drop in earnings per share (EPS) this year and I expected Moneysupermarket’s valuation to be cheaper than 16.4 times earnings, given the challenges.

Its EPS are forecast to grow 9% growth in 2019, while operating margins of 31.8% and a 4.1% yield, with cover of 1.6, might tempt you to buy. Always compare the market first, though, as there are better buys out there.

The post The insanely cheap Barclays share price could help you retire wealthy appeared first on The Motley Fool UK.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Moneysupermarket.com. 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.

Historic returns

Over the past decade, plastics producer RPC (LSE: RPC) has generated outstanding returns for investors. The stock has produced a total return of around 26% per annum since August 2008, turning £1,000 into £13,100. 

However, over the past 12 months, shares in the company have struggled as investors have started to voice concerns about the group’s growth strategy. In particular, stakeholders are concerned that RPC has been expanding too fast, and using aggressive accounting to flatter returns from new investments. Some shareholders are also worried about RPC’s role in a world that’s moving away from plastic packaging. 

The good news is, the company has not ignored investors. Management is now trimming the group’s business portfolio, exiting non-core businesses, and using the funds generated to expand further into the areas where it has the most experience. 

Today, RPC updated the market on this strategy. So far, the firm has divested its foodservice business of Letica Corporation for a total of $95m. Other divestments are also in the pipeline, including the sale of the European injection moulding automotive business. 

As well as these asset sales, it also today announced that the company is splashing out just under £34.5m to buy PLASgran, a leading UK recycler of rigid plastics. 

In my view, these actions show that management is committed to turning RPC around. There are still some accounting issues to sort out (namely the low percentage of profits that are converted to cash), but it looks as if CEO Dr Pim Vervaat and team are taking shareholder concerns seriously.

As there’s already plenty of bad news factored into the stock (the shares are trading at a forward P/E of 9.7 and yield 4.1%), I reckon it won’t take much for investors to return as concerns about the state of the business peter out. And as RPC returns to growth, based on its past performance, investors should be well rewarded. 

The best profit margins

Moneysupermarket.com (LSE: MONY) is another FTSE 250 superstar I’ve also got my eye on. 

Over the past five years, shares in the online comparison site have charged higher, registering a total return of 15% per annum. With City analysts expecting earnings per share to rise another 15.2% over the next two years, I reckon this trend isn’t going to come to an end any time soon. 

Indeed, even though shares in the business currently trade at a forward P/E of 16.5 (compared to the market average of 13.3), this is a 21% discount to the broader IT sector. 

I believe the shares deserve to trade at a premium to the rest of the IT sector. With an operating profit margin of 30% and return on capital employed (a ratio of profit for every £1 invested in the business) of 55%, Moneysupermarket is one of the market’s most profitable businesses, which means it deserves a premium valuation. Management is recycling profits into bolt-on acquisitions to boost growth, and there’s a 3.9% dividend yield on offer. 

The post These 2 FTSE 250 income growth stocks could help you quit your job appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Moneysupermarket.com and RPC Group. 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.

Moneysupermarket’s growth has slowed over the last couple of years, but in my view this business remains likely to outperform the wider market over time. In this article I’ll explain why I’m bullish about this stock and highlight another FTSE 250 firm I rate highly.

Investing for growth

Today’s figures show that Moneysupermarket’s revenue for the first half of the year rose by 5% to £173.7m. Pre-tax profit climbed 5% to £42.5m. This profit was matched by operating cash flow of £43m, lifting the group’s net cash balance by 38% to £24.4m.

This company is currently investing in its next generation of technology and services. Its Reinvent programme is expected to deliver more personalised app-based services and include mortgage price comparison for the first time.

In today’s update the group announced the formation of a new company, Podium. This will be run as a joint venture with the founders of HD Decisions, a company that provides much of the technology used for credit card and loan comparison.

Is this the best price to buy?

Moneysupermarket shares have never looked cheap compared to earnings. But the group’s high profit margins mean that this isn’t necessarily a problem.

Today’s results show that the group has delivered an operating profit margin of 29.1% and a return on capital employed of 54% over the last 12 months. Both of these figures are very high indeed.

In my view, today’s forecast P/E of 20 and dividend yield of 3.2% look like a decent entry point for such a profitable business. I’d be happy to buy more stock for a long-term position at this level.

Super profits from travel

Another company with a long history of generating high returns is newsagent WH Smith (LSE: SMWH). This Swindon-based group has been selling newspapers and sweets for more than 225 years, but its business is changing.

Growth is now confined to the firm’s travel division, which operates shops at airports, railway stations and motorway services. Sales at travel outlets rose by 7% during the first half of the year, while trading profit was 5% higher at £41m.

This is a contrast to the group’s high street division, which remains profitable but is in decline. High street sales fell by 5% during the first half and trading profit was 6% lower, at £50m. Many of Smith’s high street stores are suffering visibly from lack of investment. It seems clear that at some point, major changes will be necessary on this side of the business.

My verdict

My colleague Rupert Hargreaves takes a grim view of this situation, but my belief is that the group’s management will find a solution. In June’s third-quarter trading update, management said that trials are under way to test new and smaller store formats on the high street. I believe that a joint venture or trade sale might also be possible at some point.

WH Smith’s share price looks up with events to me, on 20 times forecast earnings. But the 2.6% dividend yield is backed by free cash flow and should continue to grow. I’d hold the stock at current levels and consider buying during the next market wobble.

The post 2 FTSE 250 dividend stocks I’m considering 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 Moneysupermarket.com and WH Smith. 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.