Menu Menu Menu Login Login Log in Search Search Search

2 mid-cap dividend kings in the making

2 mid-cap dividend kings in the making

Author: Ian Pierce

Published by
Motley Fool

3m read

6 October 10.08am

Hargreaves Lansdown is not responsible for this article's content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest. Article originally published by Motley Fool.

Investing in a Georgian bank probably isn’t most domestic investors’ first thought when seeking out high income shares, but BGEO Group, the holding company for Bank of Georgia, may be an underrated option worth checking out.

The group currently pays out a 2.59% annual yield and this figure should only grow in the coming quarters as BGEO hives off its investment business, which owns healthcare, energy and beverage assets, into a separate London-listed vehicle. This will allow investors interested in Bank of Georgia’s 23.5% return on average equity (RoE), double-digit revenue growth and commitment to paying out 25%-40% of earnings in dividends to invest directly in it.

Of course, investing in a foreign bank carries significant macroeconomic risks, but Bank of Georgia has plenty of characteristics that still make it worth considering. For one, the aforementioned RoE shows just how profitable the bank is, due to relatively low costs, higher interest rates than in the UK, impressive market share, and none of the legacy fines or bad assets that have weighed down returns for British banks.

BGEO Group plc

Sell: 3,467.00 | Buy: 3,472.00 positive 26.00 (0.75%)
Graph

Prices delayed by at least 15 minutes.

Second, the bank is expanding rapidly, but in what appears to me to be a more sustainable way than, say, British and American banks did before the financial crisis. It is growing its revenue largely by rolling out new retail banking outlets and investing in digital platforms that saw its retail banking revenue rise 29.1% year-on-year (y/y) in H1.

Now, BGEO group is not cheap by traditional metrics with a price-to-book ratio of 1.9, which for now also includes the investment assets. However, with sales and margins growing, a relatively healthy capital buffer and high growth and income potential, I reckon income investors who have an elevated risk tolerance would do well to dig deeper into the company.

Back in the black 

Another option in the same vein is Ukrainian iron ore pellet producer Ferrexpo. The recent commodity crisis was particularly harsh for the company as it was hit by both lower prices and the collapse of its major bank that wiped out significant cash reserves. However, its recovery is going well and dividends have been restored with analysts expecting a 7.06p payout and 2.4% yield this year.

Ferrexpo plc

Sell: 274.20 | Buy: 275.00 positive 1.20 (0.44%)
Graph

Prices delayed by at least 15 minutes.

Looking forward, there’s reason to expect this dividend to continue creeping up as demand for its relatively high-quality iron ore pellets is rising due to Chinese steelmakers shifting production towards higher quality and lower emission steel production. Higher prices are also improving the company’s financial position with net debt-to-EBITDA down to 0.96 times at the end of H1, which should provide more leeway for management to juice dividends.

Now, the risks involved in investing in a commodity producer should be clear to all investors. However, with Chinese steelmakers still producing unbelievable amounts of steel, the short-term outlook for Ferrexpo’s product looks fairly sound. If the company can continue to rapidly deleverage and begin re-directing a higher percentage of rising cash flow to shareholders, the company could be an interesting income option.

This article was written by Ian Pierce from The Motley Fool UK and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Free Newsroom email alerts

The headlines that matter to investors direct to your inbox

Register for daily/weekly email alerts with news from The Financial Times, Forbes, Reuters, The Economist and more.

Loading...
  • 6 October 10.08am
  • 3m read

  • AAA

Article originally published by Motley Fool. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

Other stories

HL services

Latest tweet