High-profile fund manager Neil Woodford has come in for some heated criticism recently, after a series of his largest stock holdings have fallen sharply on bad news.
Time will tell whether Mr Woodford’s decision to keep the faith in these troubled firms will be rewarded. But today I’m going to look at two Woodford dividend stocks which I believe could be great buys.
A cash-backed 8% yield
One of the great things about investing in fashion retailer Next (LSE: NXT) is that you usually know exactly what you’re getting. This company’s financial reporting is superb, in my view. Management provides detailed and accurate guidance about expectations for the year ahead. This includes details of planned dividend payments and share buybacks.
Next expects to generate £307m of surplus cash this year. Plans are in place for the majority of this cash to be returned to shareholders via four special dividends of 45p per share, in addition to the ordinary dividend, which is expected to be 159p.
Adding this all together gives an expected dividend payout of 339p. That’s equivalent to a fully-covered dividend yield of 8.2%, at the current share price of £41.
What about growth?
Looking at the bigger picture, Next stock trades on a forecast P/E of about 10.5, for 2017/18 and 2018/19. The challenge facing the group is to return to growth in a changing market.
I was cautiously encouraged by the company’s August trading statement. Group sales rose by 0.7% during the second quarter, after falling 3% during the first quarter. Hopefully this improving trend will have continued through the summer. My biggest concern is that a sizeable chunk of the group’s profits come from the interest charges on its store card. Any reduction in borrowing could dent future profits.
So far there’s no sign of this and I believe the shares remain worth buying.
A new one to consider
Forterra (LSE: FORT) isn’t exactly a household name. This £550m brickmaker floated on the London market in April 2016. Mr Woodford’s funds now own 19% of Forterra shares, making Woodford the firm’s largest shareholder.
Recent performance is certainly encouraging. Sales rose by 11% on a pro-forma basis during the first half of 2017, while adjusted pre-tax profit climbed 3.3% to £31.4m.
Although this is an adjusted figure, it’s worth noting that cash generated from operations during the same period was £31.8m, almost exactly the same. In my view, this gives the firm’s profit reporting a high level of credibility. These appear to be genuine cash profits.
This cash generation looks set to drive strong dividend growth. Analysts have pencilled in a dividend of 9.2p per share for the current year, giving a prospective yield of 3.4%. This payout is expected to rise by 10% in 2018, giving a potential yield of 3.7%.
Strong demand from housebuilders is keeping Forterra’s brickmaking plants busy. The only real risk is that high fixed costs mean that any fall in demand would be likely to hit profits hard.
In my opinion, this isn’t a stock you want to own when the housing market slows down. But if you believe that demand for new houses is likely to remain strong for several years, then this stock could be worth a closer look.