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Why I’d shun Tesco plc for this dividend-growing stock

I like the way CareTech Holdings (LSE: CTH) has raised its dividend over the last few years and Im reassured by the property-backed balance sheet. Todays full-year results from the UK-focused specialist social care services provider reveal net tangible assets of around 120m, which compares to a market capitalisation of 321m. Meanwhile, the overall property portfolio has a valuation of 329m.

An agenda for growth

On top of these basic value credentials, CareTech raised 37.4m in March to accelerate its programme of growth by funding the acquisition pipeline and organic growth projects. I think thats a good idea because trading is steady and the company operates in a sector with constant demand. The firm has a good record of robust incoming cash flow that supports profits well. Doing more of the same could enhance the value for those holding the shares. Back in March, the directors promised to put the extra placing funds to work within one year, so Im optimistic about the immediate outlook now.

Chief executive Farouq Sheikh tells us that some of the funds have already been used to acquire Selbourne Care during June and to move organic initiatives forward including property purchases and reconfigurations. But theres more to come. The top executive said:We enter the current financial year with strong underlying cash flow, solid organic growth and a sizeable pipeline of opportunities, which together give us confidence in continuing to deliver our exciting growth strategy.

Good numbers

Todays numbers suggest that the pot is boiling nicely. Revenue lifted more than 11% compared to a year ago, underlying profit before tax put on almost 13% and underlying basic earnings per share came in flat, which isnt bad considering the dilution caused by the share placing. Pleasingly, the firms net asset value rose almost 35% during the year and the directors crowned all these financial achievements with a 7% hike in the full-year dividend.

CareTech strikes me as a solid, growing firm operating in a defensive sector, and Id much rather take my chances with the shares than I would with a stock that I see as being in long-term decline such as Tesco (LSE: TSCO). These days, I think of Tesco as a dinosaur struggling to survive in a changing world. The firm was caught out clinging to an out-of-date business model that just wont work to keep the firm at the top of the pile any more.

The imminent takeover of Booker Group shows that Tesco is adapting and changing to counter the onslaught form fast-rising discounters such as Aldi, Lidl and others. Earnings resurged from their nadir this year, and City analysts expect more progress next year. I wouldnt expect the firm to collapse without a fight. However, I think the tide is still against Tesco and the most likely long-term outcome is a prolonged period of managed decline rather than a new epoch of growth.

Why I think the price is wrong

Thats why, at the current 204p share price, Im concerned about the forward price-to-earnings ratio running at almost 16 for the year to February 2019 I see it as too high. Dividends are being reinstated this year but at a shadow of their previous level, and I just dont think Tesco deserves such a growth-like valuation, so Im shunning the stock.

I’d rather trust CareTech’s long record of paying steady dividends than I would Tesco’s recent return to dividend paying. Tesco could face a valuation down-rating and I’m not prepared to take the risk. Indeed, guarding against potential drawdowns in your portfolio is the most important work you can do.

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