A ‘secret’ dividend growth stock I’d buy alongside Imperial Brands plc

This stock could deliver strong income returns to allow it to compete with Imperial Brands plc (LON: IMB) from an income perspective.

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Imperial Brands (LSE: IMB) could be one of the most attractive income stocks in the FTSE 100 right now. The tobacco and next generation products company’s share price has declined by 11% during the course of 2017, and this has made its dividend yield more appealing. Alongside the potential for high dividend growth due to a modest payout ratio and a growing bottom line, it could help investors to overcome the threat from inflation.

However, it’s not the only income stock with dividend growth potential. Announcing news on Monday was one company which could become a top dividend stock over the medium term.

Asset disposal

The company in question is media company Euromoney Institutional Investor (LSE: ERM). It focuses on media and information services provision within the financial services industry. It announced on Monday the sale of Adhesion Group and its 74% stake in World Bulk Wine Exhibition to Comexposium.

The former business is a Paris-based exhibitions company which has been owned by Euromoney for over two decades. The latter takes place in Amsterdam each year and is the top event for buyers of bulk wine. The decision to sell the businesses is in line with the company’s strategy as it seeks to recycle capital towards big investment themes such as asset management, price discovery and telecoms. Such areas could provide it with stronger growth potential in the long run.

Dividend growth

Looking ahead, Euromoney is forecast to grow its dividends per share by over 16% a year during the next two years. Even with such a rapid rate of growth, its dividend coverage ratio is expected to remain relatively high at 2.5 times. This suggests that it should be able to deliver further growth in dividends over the medium term which could allow it to grow its forward dividend yield of 2.8%.

Of course, that’s still a long way behind the 5.9% dividend yield which Imperial Brands is expected to deliver in 2018. The company could have further growth in shareholder payouts ahead in the long run due to its payout ratio being just 67%, which is relatively low for a tobacco company. It is also making substantial investment in next generation products such as its e-cigarette, blu. With smokers seeking less harmful products and regulations moving against tobacco products, next generation products could be a strong growth area for the company in future years.

Value appeal

With Imperial Brands trading on a price-to-earnings (P/E) ratio of 11.6, it appears to be relatively cheap at the present time. Similarly, Euromoney’s P/E of 15.2 does not appear to be overly generous given the company’s growth potential. As such, both stocks could prove to be sound buys for the long term at a time when the FTSE 100 is trading towards record highs and inflation is moving higher. They could offer a mix of value, dividend growth and earnings growth appeal which allows them to generate high total returns in the long run. 

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.

Peter Stephens owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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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