Why these Neil Woodford dividend stocks could beat the market in 2018

Today I'm looking at two stocks held in Neil Woodford's funds which I believe could beat the market over the coming year.

A buying opportunity?

Shares of specialist property developer Watkin Jones (LSE: WJG) fell by 6% this morning, despite the group reporting a record set of full-year results with a strong outlook for the year ahead.

What may have triggered this round of profit taking was the news that Mark Watkin Jones, the group's chief executive, has decided to step down after 15 years, "for personal reasons."

Mr Watkin Jones has transformed the firm from a building contractor into a specialist developer of student and buy-to-rent accommodation. It's understandable that the market might be nervous about his replacement, but I suspect this sell-off will quickly reverse.

Strong numbers

Revenue rose by 13.1% to £301.9m last year, lifting the group's earnings by 12.9% to 14p. The fact that revenue and earnings rose by almost equal amounts tells us that margins remained broadly flat, which is good news.

Cash generation was also strong, and the group's net cash balance increased by 27.3% to £41m. Shareholders get a 10% dividend hike, giving a full-year payout of 6.6p per share. That's equivalent to a yield of 3.1%.

Clever strategy

The company's decision to focus on student accommodation and build-to-rent property looks wise to me. Both types of property are in strong demand by institutional investors with long-term investment goals. Many of the company's properties are pre-sold, reducing risk and borrowing requirements.

I'd also expect this type of property to be largely decoupled from the regular housing market. So if that market slows or the Help to Buy scheme is cut back, Watkin Jones sales might remain fairly stable.

This success hasn't gone unnoticed by the wider market. The share price has doubled since its flotation in 2016. But with earnings expected to rise by 10% this year, I think the 2018 forecast P/E of 14.3 still looks quite reasonable.

Another opportunity

Doorstep lender Morses Club (LSE: MCL) caught a lucky break last year. With FTSE 100 rival Provident Financial in a state of turmoil, Morses noted an opportunity and accelerated its plans to expand into new territories. Reports suggest it recruited many former Provident agents, along with their customer lists.

This opportunistic move caused the group's customer numbers to rise by 12.6% to 233,000 during the six months to 31 August, while the net loan book surged 16% higher, to £65.2m.

The only slight disappointment was that impaired loans as a percentage of revenue rose 22.5% to 26.6%. The company says this is still within its target range, but in my view it's a substantial increase. I'll be keeping an eye on this going forwards.

Steady growth

The greater costs of growth and impairments last year are not expected to prevent Morses Club from delivering earnings growth for the year ending 25 February. Consensus forecasts indicate earnings per share growth of around 6%, with a stronger 15% growth pencilled in for next year.

These forecasts leave the stock on a forecast P/E of 11.5 for the current year, with a prospective yield of 5.2%. Morses' performance to date suggests to me that this could be a profitable time to buy.

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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.

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