One FTSE 100 growth stock I’d buy for a growing passive income and one I’d avoid
Ashtead (LSE: AHT) is a stock I like. The company leases construction equipment, mainly in America through its Sunbelt brand, but it does also have a UK business. Although the construction industry is often cyclical, this FTSE 100 growth stock has done fantastically for many years. The dividend has also risen impressively. It has gone from 22.5p in 2016 to 42.2p this year. Yet with the dividend covered more than 3.5 times by earnings, there’s plenty of potential for it to keep growing.
Over the same timeframe, Ashtead’s revenue has more than doubled. So it has a strong track record and that gives me faith in the management team. Management really seems to know what they’re doing.
As long as the US construction market stays in growth mode, then I think Ashtead should keep doing well because demand for equipment will hold up.
The future may be less bright if interest rates go up as that may hit the level of housebuilding. Ashtead also has to invest a lot in equipment, so it’s not an asset-light company with the huge margins found in some other industries. Yet management has done well at generating good returns on capital.
I see the equipment rental company as a consistent earnings and dividend grower, despite being in a potentially cyclical industry. I’m potentially keen to add the FTSE 100 growth stock to my portfolio, especially on any share price weakness. I think any increase in concerns over interest rates may create that opportunity.
A FTSE 100 growth stock I’ll avoid
Sage (LSE: SGE), the accountancy and business process software group has a history of slow and steady dividend growth. Its earnings per share growth over recent years has been fluctuating between negative and positive, meaning the dividend may be in trouble in future. With dividend cover this year of just 1.22, the dividend is possibly at risk of being cut.
I also fear Sage’s strongest growth is behind it. The transition to the cloud has been prolonged and not handled that well, giving the upper hand to more nimble competitors like Xero. This has tested investors’ patience and lost it the backing of successful investors like Terry Smith.
Lastly, the shares aren’t cheap. The current P/E is 27. That’s lower than many technology and software companies, but Sage is also quite a mature company. Low growth means the high P/E isn’t really justified, I feel. and I don’t see the share price or passive income from dividends going up much. I certainly don’t expect Sage to outperform the rest of the stock market in the coming years.
The only silver lining I see is that Sage generates a lot of recurring revenue, which many investors understandably like. It’s also continuing to grow in North America.
Yet these aren’t game-changing silver linings from my perspective. I’ll be avoiding Sage shares. It’s a FTSE 100 growth stock that has seen better days and I’d far rather add Ashtead to my portfolio for a growing income and share price appreciation.
Andy Ross owns no share mentioned. The Motley Fool UK has recommended Sage Group. 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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