With only two more trading days left until the end of the tax year, it’s not too late to top up your ISA with some high-quality dividend growth stocks. In today’s article I’ll look at three major companies and ask whether these big cap stocks have the potential to deliver big growth.
An unbeatable buy?
GlaxoSmithKline (LSE: GSK) is one of the largest holdings in my personal portfolio, so I may be biased. But I don’t think I’m wrong.
The UK’s largest pharma stock has now completed a restructuring programme which saw it generate £2bn of sales from new products last year. That total is expected to reach £6bn by 2018. Alongside this, Glaxo expects to deliver £3bn of annual cost savings by 2017.
The result should be a leaner business with improved growth potential. The company will also get a new chief executive in March 2017, when current boss Sir Andrew Witty is set to retire.
In the meantime, Glaxo’s 80p per share dividend gives a yield of 5.7%. Net debt has fallen and earnings are expected to rise this year, making Glaxo’s generous dividend look more affordable than it did last year. In my view, now could be a very good time to build a long-term holding in GlaxoSmithKline.
Flying high, but for how long?
Shares in budget airline easyJet (LSE: EZJ) have fallen by 13% so far this year and by 20% over the last twelve months. The falls have come despite the group reporting rising passenger numbers, stable sales and rising profits.
easyJet’s adjusted earnings per share are expected to rise by 7% this year to 148.4p. This puts the stock on a forecast P/E of 10. There’s also an attractive 65.6p forecast dividend, giving a potential yield of 4.3%.
Current forecasts suggest that earnings growth will accelerate in 2017. Analysts have pencilled in a solid 15% rise in earnings to 170.7p per share.
So why does easyJet seem to be so cheap? One reason is that the airline industry is notoriously cyclical. easyJet shares have risen by 320% over the last five years, during which profits have more than doubled. It may be that the market is pricing in a slowdown in this rate of growth. Other airline shares have also cooled this year.
However, easyJet’s valuation doesn’t seem demanding. The low-cost model seems to be here to stay. I’m tempted to say that at around 1,500p, easyJet could be a profitable buy.
An uncertain picture
Between October and December 2015, a whopping 337,000 new customers joined Sky (LSE: SKY), the highest level of UK and Ireland growth for ten years.
However, this influx of new customers isn’t expected to result in a surge in profits this year. Current forecasts suggest that Sky’s earnings per share will fall by 9.5% to 62p for the year ending 30 June. A further 7.3% decline is forecast for 2016/17.
One reason for this may be the short-term cost of reducing the group’s £6bn net debt, which is largely the result of Sky’s acquisition of Sky Deutschland and Sky Italia in 2014. Sky has always generated a lot of free cash flow, but reducing the group’s debt will still be a demanding challenge.
Given Sky’s high gearing and the lacklustre outlook for earnings growth, I’m tempted to tune in elsewhere. Sky’s forecast P/E of 16.5 and the firm’s 3.4% forecast dividend don’t seem like bargains to me.
