Today I'm looking for stocks with the potential to deliver a reliable dividend growth and decent capital gains.
One of the companies on my radar is a stock owned by star fund manager Neil Woodford. The other is a FTSE 250 stock where the boss owns 39% of the shares. Is either of these companies a buy?
Skin in the game
Chief executive Mark Coombs owns 39% of the shares of FTSE 250 asset manager Ashmore Group (LSE: ASHM). There's no doubt that Mr Coombs has plenty of skin in the game, but it's less clear to me whether the shares are attractive for outside investors.
The company's performance in recent months has been strong. Assets under management (AUM) rose by $2.8bn to $58.7bn during the last quarter, thanks to a mix of investor inflows and investment gains. Over the last 12 months, AUM has risen by 12%.
However, this is partly a result of strengthening conditions in the emerging markets in which Ashmore invests. It's not clear to me whether the firm's funds have significantly outperformed their underlying markets. The firm invests in a complex mix of currencies, debt and equities. For outside investors, it's very difficult to get an idea of how well the firm's products are really performing.
I'd say that Ashmore definitely provides a useful service to institutional investors looking for exposure to emerging markets. But I'm not sure how attractive it is for shareholders. Although the stock offers a tempting 4.8% dividend yield, the shares have only risen by 10% over the last five years. By contrast, the FTSE 250 has gained 76% over the same period. In my view, the problem is that the firm's performance is closely linked to macro factors beyond management's control.
However, Ashmore seems to be on a roll at the moment. Mr Coombs said today that investor allocations to emerging markets remain "significantly underweight". Further gains may be possible, but I don't see this as a long-term hold.
A newcomer with potential
Neil Woodford backed the 2015 flotation of IT infrastructure group Softcat (LSE: SCT). His Equity Income Fund remains a shareholder in this FTSE 250 firm.
While it's new to the public markets, Softcat has been trading since 1987. The group provides data centre, networking and security solutions for public sector and corporate customers.
This is clearly a growing sector of the market. Softcat appears to be benefitting from this trend. Sales have risen from £395.8m in 2013, to £672.4m in 2016. Profits have followed, climbing from £20.6m in 2013 to £33.2m last year.
The firm benefits from very strong financial foundations. Net cash was £46.6m at the end of January, and the firm has a strong track record of generating free cash flow to fund dividends and expansion.
Softcat stock currently trades on a forecast P/E of 19 with a prospective yield of 3.2%. Although that's not obviously cheap, I think this is a good quality business that could easily grow into its current valuation. I'd be happy to buy at current levels.
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Roland Head 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.