One of the more compelling investment ideas in the London market for me over recent years has been JD Sports (LSE: JD). Yet despite my enthusiasm, the Sports share price has fallen 34% over the past five years and now sits in pennies. Meanwhile, the JD Sports dividend yield is just 1%. That is measly, given the FTSE 100 yield at the moment is 3.4%.
But I reckon the dividend may soar in coming years. Here is why.
Dividend policy has changed
For years, the dividend was small. In 2023, for example, it was less than a penny a share for the full year.
But over the past couple of years, the company has grown its dividend fast. It now stands at 1p per share, a 25% increase over two years. The yield is still modest, though.
The company has set out its capital allocation priorities and those include a progressive dividend. That simply means that the company aims to grow its dividend per share each year, without specifying a particular target.
However, as the past two years show, current management is open to double-digit percentage annual growth in the dividend per share.
Cash generation potential could support dividend growth
Those priorities also include using surplus cash to improve returns.
The company launched a £100m share buyback programme earlier this year. It announced today (27 August) that it is planning to spend another £100m buying back its own shares.
That reflects JD’s expectation of lower capital expenditure than before, in part due to the lack of a mergers and acquisitions pipeline following several sizeable deals in recent years.
The benefit or otherwise of share buybacks to shareholders remains a contested topic. Personally I would rather JD use spare cash to grow its dividend faster, for example.
But the latest buyback announcement underlines the point that the company has a highly cash generative business model at the operating level. If reduced acquisition and shop opening spend help reduce non-operating cash outflows, that could mean JD continues to throw off significant quantities of excess cash.
Last year, for example, the dividend cost the company £52m. That looks pretty modest, at just over half the cost of the latest share buyback programme alone.
In other words, if JD had decided not to launch the latest buyback and spent the money on dividends instead, this year’s payout per share could almost have tripled.
There could be more to come
The board has opted not to do that, instead going for the buyback.
Tripling a dividend is rare. But bear in mind that even if this happened, the dividend yield would still sit beneath the FTSE 100 average.
A strong rise could also provide a fillip for the share price, as it may make the investment case for the retailer more attractive to income-focused investors.
Over time, then, I see potential for the company to use its strong free cash flows to support sizeable dividend growth.
That presumes the cash flows remain strong. Today’s trading update showed first half like-for-like sales falling year-on-year. Key product lines being withdrawn from production is an ongoing challenge to the company’s footwear sales.
But I like the long-term growth and income prospects – and plan to hang on to my shares. I think it a share for investors to consider.
