Why G4S isn't the only FTSE 100 dividend stock I'd buy today

Today I'm looking at two of the smaller companies in the FTSE 100. Both have been through difficult turnarounds, but now seem to be in a good position to deliver sustainable growth. Despite this, the market remains cautious although both shares look potentially cheap to me.

Making good progress

Outsourcing group G4S (LSE: GFS) is shifting its focus towards cash handling and technology-based security. Over time, this should help the firm move away from low-margin work that requires a high headcount. It's a strategy that seems to be working well.

Last year saw the group's revenue rise by 3.1% to £7.8bn, while adjusted after-tax profit rose 6% to £277m. Analysts expect profits to rise by another 7% to £295.5m in 2018.

So far this year, the group has signed new contracts adding £500m to annual revenue, compared to £1.4bn for the whole of 2017. A key area of growth is the group's North American cash solutions business, which handles cash for retailers. The group reported another "major contract win" in February and said the division has "a large sales pipeline".

Why I'd buy

I was very encouraged by the improvement in G4S's profitability last year. Return on capital employed -- a measure of profit compared to money invested in the business -- rose from 12.2% in 2016 to 16.7% in 2017. That's above the benchmark of 15% I use to screen for highly profitable businesses.

Looking ahead, the group's earnings are expected to rise by about 8% to 19.3p per share in 2018. This puts the stock on a forecast P/E of 13 with a prospective yield of 3.8%. In my view this is likely to be a good level to buy for a long-term income holding.

Another successful turnaround

Shares at insurer RSA Insurance Group (LSE: RSA) have risen by more than 50% since the start of 2016, as the turnaround led by chief executive Stephen Hester has delivered impressive results. Since taking charge in 2014, Hester has sold non-core businesses, cut costs, and boosted growth in core markets such as the UK, Canada and Scandinavia.

Last year saw the group achieve a combined ratio of 94%. This is a measure of underwriting profit, which shows how much is left from the group's premium income after operating and claims costs have been subtracted. Last year's figure of 94% was a new record for RSA, a pretty good figure for any mainstream insurer.

Profitable and cheap?

The combined ratio is a useful measure of profitability. But insurers also invest their premium income in the hope of achieving higher returns. A better measure of the overall profitability of the business is return on tangible equity, which measures after-tax profit against its tangible book value.

RSA's return on tangible equity rose from 14.2% to 15.5% last year. That's towards the top end of the company's target range of 13-17%, a good result in my view.

Analysts' consensus forecasts suggest that the group's underlying earnings will rise by 15% to 50.2p per share this year. The dividend is expected to rise by nearly 50% to 28.7p per share. These projections put the stock on a forecast P/E of 12.8 with a yield of 4.5%. I'd rate the shares as a buy at this level.

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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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