Why these two FTSE 250 dividend growth stocks could beat the market in 2019

The Motley Fool
Young woman sat at laptop by a window
Young woman sat at laptop by a window

Shares in food producer Greencore(LSE: GNC) are leading the market higher today after the company announced a significant cash return to investors.

After selling its US food division in November for a total of $1.08bn, management informed the market at the beginning of December that the business would be returning some of these funds to investors. The group has decided to return a total of £509m by way of a tender offer at 195p per share, an 18% premium to the company’s closing price of 166p on Wednesday.

The maximum number of shares Greencore will buy as part of this tender offer is 261m, approximately 37% of its share capital.

Slimming down

Greencore decided to sell its US business after a period of disappointing performances from the division. Management decided it was better to exit the US than try and turn the business around, which seems to have been a sensible decision.

The group is now a stronger and leaner business, with management focused on growing operations here in the UK. “We will now focus all of our attention and resources on the significant growth opportunities that we see in the UK, both organic and inorganic,” Greencore’s CEO, Patrick Coveney told investors in the full-year results release.

Now the group has put its US mistake behind it, I think the stock is well placed to outperform in 2019. The shares are currently trading at an undemanding forward P/E multiple 11.7, and the tender offer should neutralise any drop off in earnings that comes as a result of selling the US business.

On top of this, the stock supports a dividend yield of 3.4%. Management froze the per-share payout for the past three years as the company needed the extra cash to pay down debt. But now debt is under control, I can see payout growth resuming in the years ahead.

Overall, after a year of consolidation, it looks to me as if 2019 will be the year Greencore makes a comeback.

Market-beating yield

Another FTSE 250 dividend stock that’s on my radar for 2019 is Phoenix Group Holdings(LSE: PHNX).

Phoenix is an exciting business. The firm acquires closed life assurance funds and then manages them through runoff. As the company specialises in this business, it can achieve economies of scale smaller peers cannot, which makes it the consolidator of choice in the industry.

The business model is also highly cash generative, which is great news for dividend investors. The company returns virtually all cash generated from operations to investors. For example, last year it distributed 45.1p per share, giving a dividend yield of 8%. This year, analysts have pencilled in a total distribution of 46p, providing a dividend yield of 8.2%.

Usually, a near-10% dividend yield would be a strong indication that the market believes the payout isn’t sustainable. However, in this case, I think the yield is so high because the market doesn’t understand Phoenix’s business model. It looks as if the distribution isn’t covered by earnings per share, but because of the way Phoenix accounts for profits, this metric is relatively misleading. Last year, the payout was covered several times by cash produced from the runoff of closed life assurance policies. I reckon this trend is set to continue.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Greencore. 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.