Is Johnson Service Group plc a better dividend buy than National Grid plc after today’s update?

Should you sell National Grid plc (LON: NG) to buy Johnson Service Group plc (LON: JSG) after today’s news?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Textile rental specialist Johnson Service Group (LSE: JSG) has released a positive trading update today which shows it making encouraging progress. Although no details are provided regarding dividend payments, the improving performance of the business means that its bottom line is likely to grow over the medium term. Does this mean that it could become a better income play than popular income stock National Grid (LSE: NG)?

A sound strategy

Results for the year from its textile rental business are expected to be slightly ahead of expectations. This is partly due to organic growth, but also because of better than anticipated synergies following acquisitions. In addition, the company has announced the disposal of its retail dry-cleaning business for £8.25m to Timpson. This is a sound move and fits in with the wider strategy of becoming a focused textile rental business.

Part of the proceeds from the sale of the dry-cleaning business will be used to fund the pension liability, while the remainder will be used to reduce net debt. And with net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) being less than two times, the company’s financial risk is being reduced. This should help it to become a more reliable dividend payer over the medium term and means that further acquisitions could be entered into in future years.

Improving dividend

Despite yielding just 2.4%, Johnson has significant dividend appeal. This year it’s expected to pay out 2.6p per share to its shareholders, which represents a 19% annualised rise in dividends over the last five years. This rate of growth is clearly exceptionally high, but there’s scope for a similar rate of growth over the next five years.

Central to this is an improving performance by the underlying business, with earnings expected to have risen by 20% in the 2016 financial year. Furthermore, Johnson has a dividend payout ratio of only 33%, which indicates that it could raise dividends at a faster pace than profit growth and continue to have a large amount of headroom when making payouts.

A better alternative?

As a result of its rapidly growing dividend, Johnson is quickly becoming an attractive income stock. However, it has some way to go before it rivals National Grid in terms of income appeal. The utility company currently yields 4.9%, which is more than twice Johnson’s yield.

In addition, National Grid has a hugely resilient and reliable business model which means that its shareholder payouts are very consistent. As such, they’re very likely to at least match inflation over the medium term. This combination of a high yield, low risk and real-terms dividend growth makes National Grid one of the best income stocks around.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of National Grid. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »