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This dirt-cheap income stock is set for 24% dividend growth by 2019

Image: Ibstock. Fair use.

With inflation forecast to reach as much as 3% this year, a company which is able to raise dividends by 24% within two years could be worth a closer look. Clearly, there is much more to income investing than a fast-growing dividend. However, when the company in question also offers a fair valuation, a relatively high yield and growth potential, it could be worth buying for the long term.

Robust performance

The company in question is clay brick and concrete manufacturer Ibstock (LSE: IBST). It reported full-year results on Tuesday and they showed that its performance in 2016 was robust. For example, its revenue increased by 5.3% to £434.7m, while adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) was 4.3% higher. At the same time as growing its profitability, the company was also able to reduce net debt to EBITDA to 1.2 times. This seems to position it on a more stable financial footing in order to deliver growth in future years.

Growth prospects

While Ibstock is expected to record a fall in earnings of 2% in the current year, it is forecast to recover in 2018 with growth of 8%. Since its dividend was covered 2.4 times by profit in 2016, there is scope for shareholder payouts to rise at a faster rate than the company’s bottom line without reducing its payment headroom to an undesirable level. As such, dividend growth of 24% is forecast for the two years to 2019, which puts the company’s shares on a forward yield of 4%.

Given that investors are likely to become increasingly concerned about the effects of inflation during the course of the next two years, Ibstock’s shares could experience higher demand. Their price-to-earnings growth (PEG) ratio of 1.3 indicates that there is scope for capital growth over the medium term. And since the company has reported a buoyant market in the US in particular, its outlook appears to be positive.

A more enticing option?

Sector peer CRH (LSE: CRH) is forecast to record a rise in its bottom line of 24% in the current year and 15% next year. This puts it on a PEG ratio of just 1.1, which indicates there is greater upside potential on offer than for Ibstock. However, for income-seeking investors, CRH may not be the right option within the construction sector. A key reason for this is its yield of 2%. This is around half that of Ibstock and while shareholder payouts are expected to rise by 14% during the next two years, this lags the dividend growth rate of its industry peer.

Clearly, CRH could prove to be a superior growth stock over the medium term. Its diversified business model and sound growth strategy mean that it could outperform the FTSE 100 in 2017 and in future years. However, given Ibstock’s higher yield, rapidly rising dividend and strong growth potential of its own, it seems to be the superior income stock at the present time.

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Peter Stephens has no position in any shares mentioned. 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.