As such, investing in FTSE 100 dividend shares at a time when the index itself has a dividend yield of around 4.5% could be a shrewd move. With that in mind, here are two FTSE 100 dividend stocks that could offer an impressive income return over the long run.

Berkeley Group

While the housebuilding sector has experienced a difficult period since the EU referendum, Berkeley Group (LSE: BKG) continues to offer an appealing long-term income investing outlook. The company has a dominant position in the prime housebuilding sector, while its strategy of expanding into new regions of the UK could provide greater diversification and higher returns.

Berkeley Group’s dividend yield depends on whether it uses excess capital that has been earmarked for shareholder payouts on dividends or share buybacks. Either way, the company offers a generous income investing outlook, with it now expected to return £280m to shareholders per year until 2025. This could mean that it yields as much as 6% per year over the next five-plus years.

With Berkeley Group having a net cash position of £850m and demand for prime properties likely to remain buoyant over the long run, it could offer an improving income investing outlook. Trading on a price-to-earnings (P/E) ratio of 11, it also seems to offer good value for money and may be able to deliver impressive capital growth.

Smiths Group

With the prospects for the global economy being highly uncertain at the present time, the diversity offered by Smiths Group (LSE: SMIN) could be highly attractive to many investors. The company has a diverse range of businesses, with it operating in areas such as security services, oil and gas support services and technology.

In the current year, the company is forecast to post a rise in earnings of 12%. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4, which indicates that it could offer good value for money at the present time.

In terms of its income prospects, Smiths Group’s dividend yield of 3.2% may not be among the highest in the FTSE 100. However, its scope to raise dividends at a rapid rate could be high. Shareholder payouts are covered 2.1 times by profit, which suggests that they could rise at a faster pace than earnings, without putting the company’s financial standing under pressure.

With a diverse business model that has a bright future outlook, the risks of investing in the business may be lower than for some of its FTSE 100 peers. As such, now could be the right time to buy a slice of the company.

The post Forget a Cash ISA! I’d buy and hold these 2 FTSE 100 dividend shares today appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Berkeley Group Holdings. 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.

Compared to the equivalent period last year, revenue rose 2% and adjusted earnings per share eased back by 1%. The directors pushed up the interim dividend by 2.2%, suggesting a steady and reserved hand on the tiller.

A mixed bag of outcomes

Chief executive Andy Reynolds explained in the report that the firm’s John Crane, Flex-Tek and Smiths Interconnect divisions delivered “sustainable growth” in the period, but that was “partly” offset by a decline in Smiths Medical and the timing of deliveries in Smiths Detection. However, both underperforming divisions are “on track” to grow in the second half of the year. 

Looking ahead, Reynolds expects the firm to deliver “sustainable” underlying revenue growth of “at least 2%” during the rest of 2019 powered by current trading of the four industrial technology divisions and by an increasing contribution from new product launches in Smiths Medical.

In the medium term, the directors are “confident” that Smiths can grow faster than its markets. Meanwhile, over the past five years, the dividend is up around 15%, which is unspectacular. But in a separate announcement, the company confirmed its attention to make a move that could enhance investor returns going forward.

This move could change everything!

The firm plans to demerge the Smiths Medical division to create two “stronger, industry-leading companies.” The process is set to be completed during the first half of 2020 and typically in such situations, existing shareholders will end up with shares in both companies.

The spun-off enterprise will be quite a large beast. In these interim results, the medical division was responsible for just over 27% of overall revenue and around 40% of total operating profit. Reynolds explained in the announcement that he expects the proposed demerger to create two stronger companies “each focusing on accelerating the execution of their plans and maximising the opportunities in their respective markets.”

Plans are advanced and the company is already pursuing recruitment of a Smiths Medical chief executive and has drawn up a timetable and work stream plan for the demerger.  When a new boss gets his feet under the desk, the firm plans to flesh out and begin developing the new strategic plan for Smiths Medical. 

An exciting development

I think it’s an exciting development in the company and could lead to two smaller firms with greater and more-focused entrepreneurial drive. Simplification and focus on a narrower area is almost always the right thing to do in business, in my view, because it can lead to greater efficiencies and organisations that are able to respond faster to opportunities in the market.

Meanwhile, with the share price close to 1,471p, the forward-looking earnings multiple sits just below 14 for the trading year to July 2020, and the anticipated dividend yield is almost 3.3%. I think the stock is attractive.

The post This FTSE 100 dividend grower could be about to unlock value for investors appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any 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.

However, if you’re reading this article you probably prefer to invest in individual stocks, or are considering doing so. If I had £3,000 on hand today, I’d split it three ways and buy shares in FTSE 100 giants Associated British Foods (LSE: ABF), Smiths Group (LSE: SMIN) and BAE Systems (LSE: BA).

I think these companies are trading at very attractive valuations. And, as a bonus, if you’re in the early stages of building a stock portfolio, they offer considerably more business and geographical diversification than you might think.

Great entry point

Associated British Foods’ name doesn’t do justice to either its international reach or to the range of businesses under its ownership. Around 60% of the group’s revenue comes from outside Britain and around 60% from non-food businesses.

Retailer Primark is ABF’s biggest business, and its expansion into the US — still in its early days — represents a huge long-term growth opportunity. Meanwhile, its grocery, ingredients and agriculture divisions are solid performers, if lacking Primark’s dynamic growth. Its fifth division, sugar, has faced external headwinds in recent years, but improvement is expected in 2020.

ABF trades on a current-year forecast price-to-earnings (P/E) ratio of 16.8, with a rock-solid dividend yield of 2.1% and a long record of dividend growth. The P/E is low by historical standards, and I believe this is a great entry point for a long-term investment in the business.

Maximising value for investors

Industrial technology group Smiths also owns a range of businesses, serving diverse industries in diverse geographies. The company is evolving under new management. We’ve also seen disposals of non-core businesses and investment in high-growth areas where the group has scale and technology leadership.

The biggest news on this front was an announcement last November that management is preparing to separate the medical division from the rest of the group, which I think should prove value-creative for shareholders.

Smiths trades on a current-year forecast P/E of 14.8 and dividend yield of 3.2%. I view this as an attractive valuation, due to management’s focus on maximising value for shareholders. This should include a continuation of the group’s excellent long-term dividend record.

Shares a steal

My third pick, BAE Systems, also boasts a fine dividend history. In addition, it currently sports the lowest earnings multiple and highest yield of the three stocks. The forecast P/E is 10.5 and the prospective yield is 4.9%.

The company is focused on the defence sector, and its work ranges from massive military kit (for land, air and sea) to cyber and intelligence. The UK and US governments are major customers, but other markets include Saudi Arabia (18% of group revenue).

The latter territory’s behind the current weakness in BAE’s share price. The company has said a German ban on arms exports to Saudi Arabia, after the killing of journalist Jamal Khashoggi, could potentially scupper a multibillion-pound Typhoon fighter jets deal. I think there’ll ultimately be a pragmatic outcome and that BAE’s shares are a steal.

The post 3 FTSE 100 stocks I’d buy with £3,000 appeared first on The Motley Fool UK.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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 majority of my personal investments are in dividend-paying stocks, even though I’m nowhere near retirement yet. The reason for this is that I want to benefit from the amazing power of dividend reinvestment.

This is the stock market equivalent of compound interest on cash savings — earning interest on your interest. It’s a powerful force. A 6% dividend yield reinvested for five years will increase the value of your investment by 34%, even if the share price is unchanged.

Today I want to look at two FTSE 100 dividend stocks from my watch list. Could these shares help provide you with an income for life?

Buy now while it’s cheap

My first pick is advertising group WPP (LSE: WPP). The WPP share price has fallen by more than 50% over the last two years, as it’s been hit by slowing growth and a fall in profits.

New chief executive Mark Read has launched a turnaround plan aimed at simplifying the group’s structure and improving its focus on creativity and technology. Mr Read believes that he’ll need two or three years to return the group to growth. Analysts expect a further slight fall in profits this year, but they don’t expect this to affect the group’s ability to maintain its dividend.

The numbers look fairly safe to me. Earnings are expected to fall 3% to 104p during 2019, covering the 60p dividend 1.75 times. These forecasts give the stock a price/earnings ratio of 8.4 and a 6.8% dividend yield.

This valuation suggests to me that a lot of bad news is already priced into the shares. Unless something unforeseen happens to cut profits, I think the dividend should be safe at this level until WPP’s profits start to rise again.

In my view, this is a great opportunity to lock in a high dividend yield and enjoy longer-term gains when market confidence in WPP improves. I rate the shares as a buy.

A super-reliable dividend

WPP has not cut its dividend since at least 2003, the earliest I could find records. Not many FTSE 100 companies have such a proud record, but one firm that’s done even better is industrial technology firm Smiths Group (LSE: SMIN).

I was able to find dividend records stretching back to 1993 which show that this 160-year old firm has not cut its dividend for at least 25 years. That’s an outstanding record.

Can investors expect this reliable income growth to continue? The firm’s financial performance suggests to me that the dividend is very safe indeed. Last year’s dividend was covered comfortably by the group’s earnings and by its free cash flow.

Spare cash

Free cash flow is the amount of cash left over from the group’s revenue after costs, tax and interest costs. It’s an important measure for dividend investors because it shows whether a company’s payout can be funded from genuine spare cash.

Smith’s dividend has been covered by free cash flow for at least the last five years that I checked. Although the stock’s 3.2% dividend yield is below the FTSE average, I think it scores highly as a stock that could provide a reliable, growing income for decades to come.

The post Have £2k to invest for a second income? I’d buy these FTSE 100 dividends stocks 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 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.

Unfortunately, companies like these are few in number. However, they do exist. Today, I’m looking at two FTSE 100 stocks that both have these qualities.

On the defensive

The first business I think has attractive dividend credentials is BAE Systems (LSE: BA). The very nature of the defence business makes it unique. Starting such a business isn’t easy and winning contracts is even harder. Those companies that have been around a long time with an established reputation are almost certain to win the bulk of the business. What’s more, contracts in the defence business can last for decades, which gives companies like BAE those steady, predictable revenue streams I mentioned above. The group’s latest significant contract, to build a new fleet of warships for the Royal Australian Navy for example, will generate £20bn for the company over its 30-year life.

The contract with the Australian Navy, and others like it, should mean BAE can maintain its distribution to investors for many decades to come. So I think this is worth a premium valuation. 

The good news is, after the recent sell-off, the stock looks cheap, in my eyes. 

Right now, shares in the UK’s largest defence contractor are changing hands at a forward P/E of just 11 and support a dividend yield of 4.9%. The distribution is covered nearly twice by earnings per share. So as well as the attractive dividend credentials I’ve laid out above, it also looks as if the business has plenty of headroom to maintain (or even increase) the payout if earnings slide.

All in all, I think BAE is an income investment that’s worth buying and holding forever.

Established reputation

Smiths (LSE: SMIN), in my opinion, has many similar qualities to BAE. It might not be a defence contractor, but its key markets (security and seals) are all highly attractive in their own way.

Even though it’s not the most exciting business in the world, I think Smiths’ seals business (John Crane) deserves extra attention. This division produces seals for pipes and other equipment for markets such as the petrochemical industry. Here, quality is paramount, and customers are willing to pay more to get the right product because the risks are so high. This is just one example of why I think the group will still be around several decades from now.

From an income perspective, the shares don’t look particularly attractive. They currently supported a dividend yield of just under 2%, and command a forward P/E of 19.2. However, I think it’s always worth paying for quality and, in this case, Smiths is a very high-quality company. On top of this, the dividend is covered 2.7 times by earnings per share and has grown as a steady 6% per annum for the past six years.

Put simply, I think it’s worth paying a premium for the company’s quality income.

The post I would buy and hold these FTSE 100 stocks forever appeared first on The Motley Fool UK.

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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.

The Smiths

Management said that breaking off Smiths Medical should allow the remainder of the group “to concentrate on growing as an Industrial Technology group, united by shared business characteristics and a common operating model.”

This should have the further benefit of freeing Smiths Medical to deliver on its full potential and capitalise “on its leading positions, large programme of new product launches and to exploit value creating opportunities in its rapidly changing market,” although investors will have to wait until its interim results in March to hear more.

Stretch out and wait

The group also published a first quarter trading update today that reported expectations for the year remain unchanged.

Investors in Smiths need something to feel less miserable about, with the stock down 22% over the past six months and trading 5% lower than five years ago. The medical devices and equipment division has done particularly poorly, having been hit by regulatory and contract challenges (now abating), but previous attempts to offload it floundered. At least it remains on course to grow in the second half.

Well I wonder

Its John Crane arm continues to show “good growth” with an acceleration in orders and further strong aftermarket demand. Smiths Detection expects a strong second half, supported by a robust order book, while Smiths Interconnect and Flex-Tek are growing well.

Investors are banking on the fact that the break-up of the £5.5bn FTSE 100 business will unlock value. Earnings growth has been patchy for years, while revenues have grown only slowly. Despite recent woes, there’s no discount with the stock trading at 14.9 times earnings, with a forecast yield of 3.3%, and cover of 2.1. One for your watch list, though.

Boeing, Boeing, gone

Aerospace and defence group Cobham (LSE: COB) is down around 2% today after publishing a trading statement for its first 10 months that was as expected, while it “continues to make progress in executing its turnaround programme.”

Underlying operating profit in Mission Systems and Communications and Connectivity was stronger, offsetting weaker performances in Advanced Electronic Solutions and Aviation Services.

The FTSE 250-listed group’s biggest headache is its KC-46 aerial refuelling tanker programme for Boeing. The US aviation giant is claiming as yet unquantified damages from Cobham, and is withholding payments of its invoices.

Damaging

Today, Cobham said it has delivered a total of 18 production-standard Centerline Drogue Systems under its KC-46 programme, adding that “qualification of the Wing Aerial Refuelling Pods remains in its early stages with risks relating to schedule and cost.” Discussions with Boeing continue regarding its “unquantified damages assertions and payment withhold,” so there’s no clarity for investors here, which hasn’t helped the share price.

Management anticipates “significant trading activity” in the final two months, but it’s hard to construct a buy case with the stock trading at a pricey 21.6 times forecast earnings (despite falling 48% in three years), and yielding just 0.6%.

The post One recovery stock I’d consider buying today, and one I’d ignore 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 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.

Costa bravo

Back in midsummer, when Whitbread’s shares were trading at 3,893p (valuing the group at £7.15bn), I reckoned a fair sum-of-the-parts valuation was 5,200p (£9.55bn). Management had made a commitment to demerge Costa Coffee and I liked the long-term outlook for both Costa and Whitbread’s other business, Premier Inn. I also reckoned there was a fair chance of a value-outing takeover bid coming in for Costa before the demerger.

At the end of August, Whitbread announced an agreement to sell Costa to The Coca-Cola Company for £3.9bn. The shares leapt 14% on the day and went on to reach a high of 4,728p, before retreating to their current level of 4,346p. I’m still confident Whitbread’s shares deserve to trade comfortably above 5,000p — and that they will do so in due course.

Premier growth

The sale of Costa is expected to complete in the first half of 2019, with Coca-Cola needing to obtain regulatory approval in the EU and China. This shouldn’t be a problem and Whitbread is expecting net cash proceeds of £3.8bn from the sale, after transaction costs and separation costs. This will give the company considerable firepower to continue growing Premier Inn’s core UK business and to expand at scale internationally.

Given the size of the growth opportunity I see here, I view a current-year forecast price-to-earnings (P/E) ratio of 17.5, and running dividend yield of 2.3%, as offering excellent long-term value. And I wouldn’t rule out a bid for Premier Inn in the short term either.

Evolution or revolution

Industrial conglomerate Smiths is another company with value-outing break-up potential. Indeed, with five operating divisions and multiple businesses serving all manner of markets, the potential is considerable.

The current management team has focused on evolution rather than revolution but is evidently not averse to more radical restructuring. US firm ICU Medical tabled an offer for Smiths’ medical division earlier this year. The board ultimately rejected it, but the valuation put on just this one division by ICU — between £2.5bn and £2.8bn, according to Sky News — hints at the value that could be unlocked by a break-up or partial break-up of the conglomerate. The stock market is valuing the whole Smiths group at £5.4bn (at a current share price of 1,361p), and I’m confident this is well below the sum of the parts.

The company currently trades on a forecast P/E of 13.9 and running dividend yield of 3.3%. I view this as an attractive valuation for the evolving business but would hope to see an acceleration in the outing of value by more radical restructuring. On this front, I take a positive view of Smiths’ announcement last week that it’s appointed Goldman Sachs –which had advised it in its discussions with ICU — as joint corporate broker.

The post 2 FTSE 100 stocks I’d buy after October’s big sell-off appeared first on The Motley Fool UK.

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G A Chester 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 group, which produces everything from replacement knees to airport scanners and industrial pumping equipment, has seen the value of its shares fall by 20%, excluding dividends, over the past six months, following a profit warning.

Growth halt 

At the end of September, Smiths told the market that fiscal full-year sales had declined 2%, while pre-tax profits were down 28%. Investors were also less than impressed by management’s prediction that sales for this financial year would grow by “at least” 2%. Although shareholders had expected more, sales growth has averaged just 0.7% for the past five years. 

Nevertheless, despite the firm’s outlook, I believe that this could be a fantastic opportunity for long term investors.

After recent declines, shares in the industrial conglomerate are now changing hands for just 13.2 times forward earnings. That’s not cheap, but it’s significantly below the five-year average of 16.9. As well as being cheap compared to its historical average, I believe recent investor disappointment will push management into action to try and improve growth. 

Analysts are speculating a breakup or sale could be on the cards, potentially unlocking billions in extra value. And while shareholders are waiting for a value-crystallising event to emerge, they can pocket a dividend yield of 3.6%.

So, after considering the firm’s historically-cheap valuation and level of income on offer, I reckon this could be an opportunity that’s too good to miss. 

Upcoming buyout? 

Another company that’s also currently the target of bid speculation is Equiniti (LSE: EQN). 

It’s been reported that the Chicago-based private equity shop GTCR is considering making a £1bn offer for the share registrar, with some big names helping put together a proposal. 

As of yet, no concrete offer has been announced, although I can see why private equity might be attracted to this business. Equiniti dominates the share-registrar business in the UK (it provides share registration for around half the FTSE 100) and has strong relationships with many pension funds, investment funds and banks. These factors all mean that the enterprise has an exceptional competitive advantage and, with this being the case, I think shares in the company are currently undervalued, changing hands for just under 12.8 times forward earnings.

With earnings per share (EPS) set to expand at a mid-teens rate for the next two years, I reckon the stock deserves a growth premium. For income investors, there’s also a 2.5% dividend yield on offer. As the payout is covered 3.2 times by EPS, there’s lots of scope for further growth.

Considering these numbers, I think that even if a bid for Equiniti doesn’t emerge, as a stand-alone investment, this company has many attractive qualities. And with its leading position in the market, the group should remain relevant for many years to come, producing steady returns for investors through a combination of both income and growth.

The post This FTSE 100 stock is down 20% in six months. Is it an opportunity that’s too good to miss? appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Equiniti. 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.

These same characteristics apply to mid-cap Ocean Wilsons Holdings (LSE: OCN). The larger of this company’s two subsidiaries is one of the leading port, maritime and logistics operators in Brazil. Its other subsidiary owns an eclectic portfolio of international investments.

Progress under new management

Smiths Group has five operating divisions that serve diverse markets. Following a change of management in 2015, the company has been rationalising its portfolio to focus on markets with good growth prospects and where it is, or can be, a top three player. To this end, it’s sold nine businesses and bought four over the last two years and reckons the group’s positioning in attractive markets has moved from 60% to 80%.

In the medium term, once its ‘fix-or-sell’ strategy is complete and with the investment it’s been making in its favoured businesses, management is confident the group will achieve organic annual revenue growth above the 3%-4% of its chosen markets. I’ve been impressed with the progress made by the new management so far. The shares reached a high of over 1,800p during the summer and I reckon the current price of nearer 1,500p, which is 15 times current-year forecast earnings with a 3% dividend yield, could prove a bargain, if management delivers on its medium-term target.

Value-unlocking options

It’s also clear that the board of directors isn’t averse to a more radical unlocking of value for shareholders than by the piecemeal disposals seen to date. The group recently discussed (but ultimately turned down) a reported £2.8bn offer for its medical division from US firm ICU Medical. Analysts’ sum-of-the-parts valuations of Smiths Group vary, but the approach by ICU clearly shows there’s value there. The medical division contributed 28% to group revenue last year, while the mooted ICU offer for it was equivalent to 47% of Smiths’ current £5.95bn market cap.

The way I see it, whether management delivers (with or without a major disposal), or whether management falls short and activist investors push through a value-unlocking break-up of the group, the stock is currently cheap and I rate it a ‘buy’.

Additional value

Ocean Wilsons currently trades on a slightly lower earnings multiple and higher dividend yield than Smiths Group — a rating little changed from when my colleague Peter Stephens extolled its capital and dividend growth prospects last autumn. With its main subsidiary (Wilson Sons) listed on the Sao Paulo stock exchange and much of its portfolio of international investments being traded funds (such as Findlay Park American), Ocean Wilsons’ sum-of-the-parts valuation is a fairly straightforward matter. I reckon it’s currently around 1,500p, compared with a share price of 1,045p.

Furthermore, there may be additional value within the Wilson Sons subsidiary. Management is currently looking at strategic options for the container terminal part of the business. This is with a view to maximising shareholder value in light of some recent buyers in the sector willing to pay high prices. However, even if nothing comes of this particular avenue of exploration, Ocean Wilsons is another stock I see as cheap. I’d be happy to buy today.

The post 2 cheap stocks I’d buy right now appeared first on The Motley Fool UK.

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G A Chester 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.

One company whose shares I don’t currently own is Lloyds Banking Group (LSE: LLOY). Although the bank’s 5.5% dividend yield is attractive and looks safe enough for now, I think long-term investors may be able to enjoy much greater gains elsewhere.

I’ll come back to Lloyds shortly. But first I want to explain why I’m tempted to buy shares in FTSE 100 engineering conglomerate Smiths Group (LSE: SMIN) after today’s results from the firm.

Smiths operates in sectors including medical technology, defence and oil and gas. Example products include medical devices, airport security scanners and parts for oil and gas refineries.

A long-term performer

Over the last 10 years, Lloyds’ share price has fallen by more than 60%. During the same period, Smiths’ shares have risen by about 50%.

The engineering firm maintained its dividend throughout the financial crisis, and has increased its payout each year since 2011. In contrast, Lloyds paid no dividends from 2009 until 2015.

It’s pretty obvious which company has taken best care of its shareholders over the last decade. Can this continue?

A turning point

Today’s full-year results from Smiths show a mixed picture. Currency headwinds caused revenue to fall by 2% to £3,213m last year. And headline pre-tax profit fell by 8% to £487m.

However, the company says that on an underlying basis — excluding various one-off factors such as acquisitions and disposals — earnings per share of 90.7p represent a 4% increase on the previous year.

I’m normally cautious about such wide-ranging adjustments, but in this case I think they are fair. Analysts expect underlying earnings to rise by about 10% this year, and I don’t see any reason to doubt this.

Cash-backed profits

One reason for my optimistic view is that the group’s statutory (non-adjusted) results seem pretty solid. Free cash flow of £302m represents 108% of the group’s after-tax profits of £279m. This level of free cash flow means the dividend is covered 1.7 times by surplus cash, so it should be pretty safe.

One reason for Smiths’ strong cash generation is that it’s quite profitable. The headline operating profit margin was 16.9% last year, while return on capital employed was 14.6%. Both figures suggest to me that this is a quality business.

What about Lloyds?

Lloyds’ preferred measure of profitability is return on tangible equity (RoTE). This metric has risen from 6.3% in 2016 to 12.1% during the first half of this year.

That’s a respectable figure. What concerns me is that Lloyds’ consumer-focused retail banking model is highly cyclical. In a recession, bad debts usually rise and new borrowing falls. This combination can crush a bank’s profit margins.

What I’d buy today

I don’t think there’s much wrong with Lloyds’ shares at their current price. The forward yield of 5.4% seems affordable and the shares are trading close to their book value.

Smiths Group looks more expensive, with a 2019 forecast P/E of 15 and a yield of just 3%. But I think its superior profitability and diverse mix of business makes it likely to outperform Lloyds over the long term.

If I wanted shares I could buy today and forget for the next 10 years or more, I’d choose Smiths.

The post Tempted by the Lloyds share price? Why I’d buy FTSE 100 faller Smiths Group first 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 Lloyds Banking 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.