The FTSE 100 dividend stock I'd sell to buy this growth star


I used to be a stakeholder in so-called Big Tobacco, my holding in Imperial Tobacco giving me access to reliable dividend growth as well as market-beating yields.

But as lawmakers intensified their war on smoking I sold my entire stake, and the FTSE 100 giant's heavy share price slide since then has vindicated my decision.

Fellow Footsie play British American Tobacco (LSE: BATS) is, needless to say, another share facing the same escalating earnings pressure as Imperial Tobacco. Despite the strength of market-leading brands like Pall Mall and Dunhill, global cigarette demand continues to fall as legislation from plain packaging requirements to public smoking bans have become ever-more popular.

Naturally I would encourage shareholders in British American Tobacco to follow my lead and shift out post haste. After all, there is no shortage of shares with pluckier profits outlooks that the London-based business.

Renishaw(LSE: RSW) is one such stock that I, like many others, believe investors should give close attention to today.

Ride the dip

At first glance my enthusiasm for Renishaw could be considered ill-placed given that latest trading details released on Thursday saw its share price duck sharply. It was recently down 10% on the day.

But while its first-half performance fell short of expectations, numbers were far from catastrophic and in my opinion did not justify today's sell-off.

Rather, the plunge reflects a great deal of profit-taking following the FTSE 250 firm's steady climb. Its market value had almost doubled in the 12 months until this morning's update. And I reckon today's reversal marks a prime opportunity for some shrewd dip buying.

Sales star

Renishaw saw group revenues jump 17% between January and June, to £279.5m, a result that powered adjusted pre-tax profit 72% higher to £62.3m. And this sales spurt was broad-based -- at Metrology turnover leapt 18% to £264.3m, while at its Healthcare unit sales rose 13% to £15.2m.

The solid result prompted the Gloucestershire business to suggest that full-year revenues could blast through the £600m marker for the first time this year. Revenues of between £575m and £605m are anticipated for the fiscal period.

Today's sell-off is not a huge surprise given that, as impressive as today's numbers were, they still fell on the wrong side of City predictions. After all, Renishaw has long been an expensive share selection and, even after today's downward spike, it still deals on a forward P/E ratio of 31.6 times.

Having said that, the prospect of strong and sustained earnings growth still makes the electronics play an appealing contender for me at least. The number crunchers are anticipating bottom-line expansion of 20% and 7% in the years to June 2018 and 2019 respectively.

City analysts are also expecting earnings at British American Tobacco to keep growing too, and rises of 13% and 7% are forecast for 2018 and 2019.

However, this leaves the company dealing on a forward P/E ratio of 15.6 times. This is far too high in my opinion given the structural decline in its traditional markets and uncertainty over the scale to which next-generation goods like tobacco-heating products and e-cigarettes can replace lost revenues elsewhere.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Renishaw. 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.