To mark the start of the new ISA year, I’m looking for quality dividend stocks with growth potential. I’ve focused my attention on the FTSE 250. In my experience, this mid-cap index is often a good place to look for businesses that are profitable and successful, but still have room to grow.
A truly great business?
Two companies have caught my eye. The first of these is specialist plastics manufacturer Victrex (LSE: VCT). This firm’s PEEK and PAEK polymers-based parts are used in thousands of applications, including cars, aeroplanes and orthopaedic surgery.
Victrex has a strong track record of growth. Over the last five years, sales have risen by 29% to £326m. Pre-tax profits climbed 24% to £127.5m. The dividend has risen 32% over this period and shareholders have also received three generous special dividends.
As these figures suggest, this is a very profitable business, with an average operating profit margin of about 40% over the last five years. Such high margins suggest to me Victrex products are hard to substitute and have strong pricing power — good news for investors.
One final attraction is this business generates a lot of cash and has no debt. At the end of last year, net cash stood at £144.4m.
Is this the right time to buy?
Victrex shares have fallen 30% over the last six months, after management warned that weaker demand from car manufacturers and consumer electronics firms could slow growth this year.
The outlook is expected to improve during the second half of the year, although it’s too soon to be sure. Personally, I’m not too worried. I see this as a high quality business with good long-term prospects.
Although the shares still look pricey on 17 times 2019 forecast earnings, they offer a forecast yield of 5.2% that’s supported by the firm’s cash generation. In my view, now could be a good time to build a long-term holding in this company.
I’ve bought this 8% yield
My next pick is financial spread betting and CFD trading group IG Group Holdings (LSE: IGG). This sector has fallen out of favour with investors over the last year, due to the impact of new regulations limiting the amount of leverage that can be offered to non-professional clients.
This has had the effect of forcing traders to scale back their positions or provide more cash up front. As a result, IG’s revenue is expected to fall 12% to £503m during the current financial year.
IG shares have fallen 35% in 12 months and some investors have questioned whether the dividend is sustainable. However, like Victrex, IG is extremely profitable and has a cash-rich balance sheet.
The board says the payout will be left unchanged at 43.2p per share until earnings return to growth. That sounds reasonable to me, at least for a couple of years. In that time, I expect performance to improve as the group’s international growth and diversification continues.
IG shares currently trade on 11 times forecast earnings, with an 8% dividend yield. I’ve added some shares to my portfolio and rate this stock as a buy.
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Roland Head owns shares of IG Group Holdings. The Motley Fool UK has recommended Victrex. 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.
Motley Fool UK 2019