Pennon Group plc isn’t the only stock set to deliver blockbuster dividend growth

I reckon this dividend-growing firm sits well alongside Pennon Group plc (LON: PNN).

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Taking predictions for the current year’s dividend into account, Pennon Group (LSE: PNN) has raised its dividend by more than 35% over the past five years, which isn’t too shoddy. City analysts following the firm expect a further increase of a little over 7% for the trading year to March 2019.

The Company owns South West Water Limited, Bournemouth Water Limited and Viridor Limited, making it a player in the water and waste management businesses – all good defensive operations that, on the face of it, are capable of delivering the steady flows of incoming cash necessary to keep the taps turned on for dividend payments.

Trading in line with expectations

In September, the firm told us it is trading in line with management expectations, which the City braces have down as broadly flat earnings in the current year and a lift of 13% next year. We’ll find out more with the half-year results due out on 29 November.

Meanwhile, at today’s 796p share price, the forward price-to-earnings (P/E) ratio runs just below 15 for next year and the forward dividend yield a little over 5%. Those forward earnings look set to cover the dividend around 1.3 times. To me, the valuation looks fair, but it’s worth keeping an eye on the levels of debt the firm carries as utility operations tend to demand lots of ongoing capital investment. On that score, I don’t think there’s much to worry about for the time being because interest cover from operating income sits at a comfortable-looking 6.5 or so.

Pennon looks like a decent candidate for income-seeking investors but I think it’s also worth considering St. James’s Place (LSE: STJ), the FTSE 100-listed wealth management company updated the market today about third-quarter trading to 30 September. The period has been good. Gross inflows of funds under management mushroomed more than 28% and net inflows are around 42% up compared to the equivalent period a year ago.  The firm now manages almost £86bn of other people’s money, 20% more than last year.

Doing something right

St. James’s Place is doing something right to attract customers. Chief executive David Bellamy puts it down to the globally diverse range of funds and portfolios the firm offers and the way it maintains its current investment offering while striving “continually to offer appropriate breadth of choice and a diversified range of funds to meet their long-term investment objectives.” Mr Bellamy thinks the company is on track to meet its medium-term growth objectives and City analysts following the firm see earnings shooting up an impressive 88% this year and 23% next year.

Today’s 1,177p share price throws out a forward P/E rating for 2018 just below 24 and the forward dividend yield runs a little over 4% with the payment covered once by anticipated earnings. Given the growth on offer, I think the valuation looks fair. If the 2018 dividend hits analysts’ expectations, the payment will have increased by more than a whopping 340% over six years. I reckon this one could be worth considering for sector diversification in an income-focused portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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