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

Photo credit: Fletcher6

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.

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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.