When it comes to looking for dividend growth, it can pay to look outside the FTSE 100 index. Just look at stocks such as Royal Dutch Shell and GlaxoSmithKline – these companies have not lifted their dividend payouts for years.
With that in mind, today I’m profiling two under-the-radar companies that have increased their payouts significantly in recent years and should continue to do so going forward.
Inchcape
Inchcape (LSE: INCH) is an automotive distribution and retail group that operates in 29 countries, including both developed and emerging markets. The company works with many of the world’s leading car brands such as BMW, Audi, Toyota and Ford.
It has enjoyed a strong rise in revenue and earnings over the last five years and this has enabled the company to reward shareholders handsomely with consistent dividend increases. Indeed, between FY2011 and FY2016, the payout was increased from 11p per share to 23.8p per share, a compound annual growth rate (CAGR) of an excellent 17%. The dividend was raised 14% last year and City analysts have pencilled-in dividend growth of 12% and 8% for this year and next year.
The forecast payout of 26.7p this year equates to a yield of 3.5% at the current share price, and this is expected to be covered by earnings per share of 64.2p, giving a dividend coverage ratio of a healthy 2.4 times.
It’s worth noting that the luxury automotive industry is cyclical, meaning that profitability can decline at times in the business cycle. However on a forward P/E of just 11.8, Inchcape doesn’t look expensive right now and with the dividend forecast to keep growing, I believe the stock could be an interesting long-term opportunity for dividend growth investors.
Headlam Group
Also increasing its dividend payout significantly in recent years is Europe’s largest distributor of floor coverings, Headlam Group (LSE: HEAD).
Like Inchcape, it has generated consistent revenue and earnings growth in recent years and this has enabled the company to grow its dividend at a robust growth rate. The dividend payout has been lifted from 14.2p to 22.6p over the last five years (CAGR 10%), including a 17.3% rise last year, and City analysts expect another generous increase of 16.5% for 2017. Dividend coverage is anticipated to be around 1.5 times.
Headlam’s share price has pulled back a little over the last few months, dropping from around 640p to 540p today. With around 85% of revenues generated within the UK, it’s understandable that sentiment towards Headlam is a little off right now.
However, when a company’s share price declines, its dividend yield increases, and I reckon the fall may have created a decent opportunity for long-term investors, as the forward yield on offer is now a generous 4.9%. A forward P/E ratio of 13.3 does not look expensive, and in my opinion Headlam could turn out to be a dividend gem for those willing to invest with a long-term horizon.
