Dividends took an almighty smack in 2020 as Covid-19 damaged corporate profits and bashed balance sheets. But it looks like payout levels from UK shares might recover strongly in the later half of this year. That’s on condition that the economic recovery kicks in as expected, of course.
The possibility of handsome dividend growth over at Halfords Group (LSE: HFD) makes this one UK retail share worth serious attention, in my opinion. The company’s share price rocketed to two-and-a-half-year highs this week on the back of a robust trading update. Though news of soaring cycling and auto-services sales weren’t the only things that caught people’s eyes.
Are dividends set to soar?
Analyst Sophie Lund-Yates of Hargreaves Lansdown said: “The strong trading update means it’s likely the balance sheet is still in good nick… Quite what the group plans to do with that stash is unknown, but an attractive dividend can’t be ruled out.” Strong trading and cost slashing helped Halfords enjoy net cash of £97.8m as of the beginning of October.
City analysts tend to think annual dividends will soar over the medium term. A 1.1p total dividend is predicted for the outgoing financial year (to March 2021). And this jumps to 7.9p for fiscal 2022, which in turn drives the yield to an inflation-beating 2.4%. Next year’s bulky payout is covered 2.6 times by anticipated earnings too, giving investors extra confidence that Halfords will meet current estimates. A reading of 2 or above is widely considered as being quite robust.
Bear in mind that trading at this UK retail share might begin to struggle later in 2021, however. And this could naturally have an impact on actual dividend levels. Firstly, demand for cycles might slump as Covid-19 lockdowns are rolled back and gyms reopen. It could also see demand for its high-ticket products fall if a long and painful downturn in the British economy kicks in.
A UK bargain share
I still think Halfords is a very-attractive dividend stock for long-term investors like me. Its strongly-performing Autocentres services arm should continue gaining market share as it expands. The company eventually plans to have 1,000 garages on its books, up from the 370 or so workshops it currently operates.
Jaunty demand for its bikes and cycling products could also remain a thing as people avoid public transport post-pandemic. Rising environmental concerns could see people increasingly leaving the car at home in favour of pedal power. And rising health awareness could keep its bikes rolling out of stores too.
Today Halfords trades on a sub-1 forward price-to-earnings growth (PEG) ratio of 0.6. It’s a reading that suggests that the UK retail share might still be undervalued despite its share price leap this week. I’d happily buy this dividend stock for my Stocks and Shares ISA today.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.