Two troubled FTSE 250 dividend stars: should you buy them?

Every star has its dark side. The following two FTSE 250 high-flyers have seen almost as many lows as highs lately. Where might they go next?

Saint and sinner

St Modwen Properties(LSE: SMP) styles itself as the UK's leading regeneration specialist, with a 30-year track record in commercial and residential developments. The company has a market cap of £793m, a current portfolio value of £1.75bn and more than 100 projects underway. It aims to build business parks and town centres on former industrial estates and disused brownfield sites, with projects including the £1bn Longbridge scheme, and the £450m Bay Campus Swansea University revamp, which it now plans to sell.

Its share price has seen plenty of volatility, it currently trades 8% lower than it did three years ago, yet is up 116% over five years. Like many developers, St Modwen has recovered well since Brexit, and now stands 20% higher than six months ago. It recently hiked its dividend 4.3%, lifting it from 5.75p to 6p a share, and now trades on a forecast yield of 1.8%, nicely covered four times.

Resilience

On Wednesday, chief executive Mark Allen announced that St Modwen is to accelerate its commercial development activity and grow its residential and housebuilding business, building on a positive start to the year. He said the firm's portfolio and wider business has shown "resilience in the face of broader market uncertainties," and after Thursday's election shock, that claim is about to be put to the test.

The current valuation of 14.8 times earnings looks reasonable enough, but the forward valuation is higher, at 18.8 times, thanks to a projected 25% drop in earnings per share (EPS) in the year to 30 November 2017. Growth of 3% is expected after that. However, St Modwen's 35.9% operating margins and price-to-book (P/B) ratio of just 0.8 offer cause for comfort. Its halo may have slipped lately, but it can still shine.

Who's Nex?

Nex Group(LSE: NXG), formerly ICAP, provides trading platforms, tools and expertise for global banks, asset managers, hedge funds and corporates. Its share price has been trading positively, up 26% over the past 12 months, as the company has boosted revenues and profits, while simultaneously warning that activity has been subdued.

In May, the financial broker posted a healthy 18% rise in full-year revenues from £460m to £543m, with statutory pre-tax profit spiralling from £27m to £120m. It also sold ICAP Global Broking to TP ICAP for £1.3bn, which chief executive Michael Spencer claimed delivered exceptional value to NEX shareholders. However, he also warned of a tough market environment, with trading down due to low market volatility.

Going for broke

Nex doesn't look so cheap trading at 27.97 times earnings. However, it does trade on a low forecast price-to-earnings growth (PEG) ratio of just 0.7, which suggests it is undervalued. The dividend looks tempting with a yield of 5.9%, but watch out, that is forecast to fall to 2.1%.

Anticipated EPS growth of 31% in the year to 31 March 2018, followed by 19% the year after, do inject an element of excitement. I am also impressed by plans to increase operating margins to at least 40% in 2017/18, a large increase from 27.8% today. It could be an exciting play if market volatility returns. As it may.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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