2 dividend growth stocks that could help you make a million

Paul Summers highlights two defensive stocks that look set to keep hiking their bi-annual payouts.

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Shares in waste management giant Biffa (LSE: BIFF) retreated almost 5% this morning, putting an end to the positive momentum enjoyed by holders over recent weeks. Based on today’s set of full-year numbers, that seems a little harsh.

Heralding “another pleasing year of organic and acquisitive growth,” net revenue rose 8.8% to £977.7m over the 53 weeks to 30 March. Underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) rose 8.9% to £150m and pre-tax profit jumped 32.2% to £59.6m.

Away from the figures, the company said it made “good progress” in analysing the opportunities in the energy from waste space and expects to report on an investment in such facilities “in due course“. Despite “challenging” markets, the economic and environmental drivers in recycling also “remain compelling” and investors will likely be pleased to hear that the company is positioning itself to take advantage of these in the future. 

So, why the fall? Given that expectations for the current year remain unchanged, most of this can probably be attributed to the announcement that CEO Ian Wakelin has decided to leave the company. Chief Financial Officer, Michael Topham will take the reigns once a successor for his post has been appointed. After rising 15% since the end of May, some profit-taking was also to be expected.

Time to buy?

Earnings per share of 19.2p for the last financial year leave Biffa’s shares trading on 12 times trailing earnings. That seems fairly reasonable considering the defensive nature of its work and its future outlook.

The 88% rise in the final dividend — from 2.4p to 4.53p per share — is another positive and gives prospective investors some indication of how committed management is to growing payouts. A total dividend of 6.7p per share might leave the stock on a trailing yield of only 2.9%, but the fact that underlying free cash flow rose from £28.8m in 2016/17 to £44.4m in the last financial year suggests further increases look pretty likely.

Taking all this into account, I continue to think that Biffa is worthy of consideration from defensive-minded value and income investors.

Another winner

Pest control company and FTSE 100 constituent Rentokil Initial (LSE: RTO) is another stock whose less-than-appealing line of work hasn’t stopped it from strongly rewarding shareholders over the last few weeks. 

Ongoing revenue increased by 15.7% to just under £546m in the three months to the end of March, even if organic revenue growth of 3.2% was down on the same period in 2017 due to the aftermath of a hurricane in Puerto Rico and “unseasonably cold” weather in the US keeping bugs away.

The company’s pest control business continues to perform with ongoing revenue moving 15.8% higher.  Particularly noteworthy was the 38.2% rise from operations in emerging markets, highlighting the company’s global reach and promising growth opportunities.  Q1 revenue at its Hygiene services also soared by almost 30% thanks to recent acquisitions. Indeed, the only slightly negative news in April’s trading update appeared to be the small decline in ongoing revenue from its Protect & Enhance division. 

With a history of double-digit dividend hikes, Rentokil is another quality company that’s not averse to returning cash to its owners. The only downside is that a forecast yield of just 1.2% for the current financial year still looks rather small. This, combined with its rather frothy valuation (28 times earnings) suggests this might be one to buy on the dips.

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.

Paul Summers has no position in any of the shares 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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