2 FTSE 250 dividend growth stocks I’d buy with £5,000 today

These FTSE 250 (INDEXFTSE: MCX) stocks could be future dividend champions.

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The last time I covered Grafton Group (LSE: GFTU), I concluded that the company’s historical earnings growth more than justified its valuation of 15.9 times historic earnings, and shareholders would be well rewarded as growth continued.

And even though the stock has hardly budged since my last article was published, I’m still positive on the outlook for the business.

Unfortunately, bad weather during the first few months of 2018 has hit sales, but management remains optimistic that the group will be able to catch full-year targets. According to a trading update issued by the firm today, adverse weather reduced the rate of growth in average daily like-for-like revenue to 1.3% for the period to the end of April. Overall revenue increased by 7% to £907m in the four months and 6.2% in constant currency.

It looks to me as if geographic expansion has been Grafton’s saviour. The company owns the market-leading building merchanting business in Ireland, which delivered constant currency revenue growth of 7.6% for the period, while its business in the Netherlands saw revenue increase by 20.5%. Meanwhile, even though the snow hammered trading at its established UK business, the group acquired Leyland SDM (the largest independent specialist decorators’ merchant in London) on 16 February and this deal helped to increase UK revenue by 5% overall.

On track for growth 

Overall it looks as if, including acquisitions, Grafton’s earnings are set to grow at a high single-digit rate for the full year. City analysts have pencilled in growth of 7% for 2018, followed by an increase of 8% in 2019. Based on these targets, the stock is trading at a forward P/E of 12.8, which does not seem too demanding for a growth stock, even though there is some uncertainty about the state of the construction industry here in the UK. However, with net gearing of only 5.3%, the company seems well placed to weather any market turbulence. 

As well as the company’s attractive valuation, Grafton also has a history of increasing its dividend per share by around 10% per annum. The stock currently supports a dividend yield of 2.2%.

Value hunters 

Another dividend growth stock that has recently popped up on my radar is B&M European Value Retail (LSE: BME). 

It might look expensive as the shares currently trade at a forward P/E of 21.3, but the company is growing rapidly. City analysts are expecting earnings per share growth of 21% for 2018 and 19% for 2019. Based on these estimates, the stock is trading at a PEG ratio of 1.1.

It’s BME’s dividend potential that really gets me excited. The shares currently support a dividend yield of 1.7%, but the company is expected to increase its payout by 46% this year and a further 16% for 2019. Based on these estimates, the shares support a 2018 dividend yield of 2.1%, growing to 2.5% by 2019.

With the payout set be covered 2.3 times by earnings per share, there’s plenty of room for growth in the years ahead, especially if earnings per share continue to rise at a double-digit rate. There’s no reason why they can’t. BME is investing heavily in its value proposition across the UK and Europe and reported strong trading during the last quarter of 2017, underlining the appeal of discount retailers to increasingly budget-conscious consumers.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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