2 growth and dividend stocks I’d buy with £2,000 right now
Shares in DS Smith(LSE: SMDS) have tumbled over the past month, and it’s led my Fool colleague Royston Wild to take the plunge and buy some shares. As he says, since then the price has fallen further, so do I think he made a mistake?
No, I do not, and I can see what he likes in the company.
Looking back over the past few years, the packaging company has been steadily growing its earnings per share — and is expected to continue to so so for the next two years too.
An update on Tuesday supported the upbeat forecasts, as the firm told us it expects “return on sales and adjusted operating profit in the half-year to be materially ahead of the comparable period.” In addition, the company anticipates “cash flow from operations to be significantly ahead of the prior period.”
Competition
As Royston pointed out, the share price rout has been triggered by intensifying competition from Chinese rivals, so some uncertainty is surely justified. But as so often happens, I think the market has overreacted to the news and I see the shares as oversold now.
What we’re looking at is a share priced at under 10 times its forecast earnings for the year to April 2019, with EPS expected to grow sufficiently to drop the PEG ratio a tempting 0.6 (which is typically seen as a good indication of an undervalued growth stock).
On top of that, analysts are expecting to see dividend growth resuming this year, with a twice-covered yield of 4.3% on the cards, rising to 4.6% by 2020.
Back to growth
Shares in Weir Group(LSE: WEIR) also spiked on Tuesday, gaining 6% on the back of a third-quarter update which lent support to the company’s recovery and return to earnings growth.
While balancing “strong order growth in mining” with a “temporary slowdown in North American oil and gas,” the engineering firm reported a 16% rise in Q3 orders from continuing operations (and a 40% boost once contributions from recently acquired ESCO are included).
Weir has been hit by the slowdown in the oil and gas sector and the slump in commodity prices, but with markets getting back up to healthy levels, demand is clearly on the up again. And even with the North American slowdown, oil and gas orders were still up 10% in the quarter — and EBITA from oil and gas is expected to come in around £90m to £100m.
Strengthening orders
Chief executive Jon Stanton told us that “orders continued to grow strongly in markets that have good long-term prospects,” also voicing the firm’s view that it is “in the early stages of a multi-year capex growth cycle.”
Analysts appear to agree, with forecasts of 20%+ EPS growth for this year and next dropping the potential P/E to 12.6 next year, and again giving us tasty PEG indicators — of 0.7 and 0.6 for this year and next.
While Weir’s predicted dividend yield is not as high as DS Smith’s at only around 3%, the company maintained its payout through the past few tough years, and progressive rises look set to resume with strong cover of 2.6 times on the cards for 2019.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith and Weir. 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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