All too often, dividend investors are drawn to stocks with very high yields. This means they often buy stocks with weak dividend growth outlooks, and miss out on potentially better opportunities that lie with companies that have an established track record of growing their dividends. These stocks may start off with a much smaller yield, but over time they deliver an ever-growing income stream and potentially superior total returns.
Here are two FTSE 100 companies I expect to boost their dividends substantially in the coming months.
Improving earnings outlook
Going by the recent British American Tobacco (LSE: BATS) recent operating performance, I’m confident the tobacco giant will raise its dividend very soon. Revenue for the company grew by almost 8% year-on-year in constant currency terms during the first half of 2016, as core brands benefitted from higher sales volumes and good pricing. Adjusted diluted earnings per share were up by almost 11%, with further profit growth likely to be weighted towards the second half of the year because of short-term currency headwinds.
The company, which earns most of its revenues in emerging market currencies, had been hard hit by the slump in the Russian rouble, Brazilian real and South African rand. However, as these emerging market currencies have strengthened considerably against the pound following the Brexit vote, its full-year earnings are set to get a rather significant boost.
Following a series of healthy upward revisions in recent weeks, city analysts now expect the company’s earnings per share will grow 17% this year, to 244p. And on top of this, adjusted EPS is forecast to grow another 12% in the following year, to 274p.
That’s great news for income investors, because rapid earnings expansion is almost always the precursor to robust dividend growth. And while the pace of dividend growth has slowed in recent years (from 17.1% in 2010 to just 3.8% for the most recent interim dividend), British American Tobacco should once again be in a strong position to re-accelerate dividend growth thanks to its improving earnings outlook.
Scope for dividend growth
Meanwhile, publisher Relx (LSE: REL) is expected to post a 16% rise in adjusted EPS this year, with a further increase of 10% pencilled-in for 2017. Like British American Tobacco, Relx generates most of its revenues from outside of the UK, which allows it to benefit from improved sterling earnings translation of its foreign income.
But in addition to a weaker pound, Relx is set to benefit from the sector’s shift from print to digital. The company’s specialisation in scientific and medical publishing and its rich datasets give the company a unique competitive advantage as the market undergoes a structural shift. And already there are signs that it’s doing well in leveraging its strengths. Adjusted operating margins have improved from 27.6% in 2012 to 30.5% last year, thanks to the fixed costs of running digital infrastructure.
Quietly, Relx has also put together an impressive dividend growth story. Over the past three years, dividends have grown by an annual compound average growth rate of 8.9%. With an attractive earnings outlook and a dividend coverage ratio of two times, Relx is in a strong position to reward shareholders with increasing dividend payouts in the future.
