The FTSE 100’s Hottest Dividend Picks: Marks and Spencer Group Plc

Today I am looking at why I consider Marks & Spencer (LSE: MKS) (NASDAQOTH: MAKSY.US) to be an attractive dividend stock.

Fashion lines back in vogue?

Despite a strong image revival for Marks & Spencer around the turn of the millennium, accusations that the firm is once again peddling tired and expensive fashion lines has whacked activity at the tills in recent years. The effect of fierce competition, combined with enduring pressure on consumers’ spending power, has hardly helped breathe life into the retailer’s clothing departments, either.

marks & spencerWith Marks & Spencers’ premium togs falling out of favour, earnings — and with it dividend growth — have stalled badly in recent years. Indeed, the business has kept the full-year payout locked at 76p per share for the past four years as a result.

However, last year’s modest 1% earnings revival seems to have marked a meaningful, if unspectacular, revival in the company’s fortunes, at least when looking at current broker expectations. Current forecasts point to a meatier 4% rise for the year concluding March 2015, with a further 10% rise anticipated for the following 12-month period.

Marks & Spencer reported that group sales in the UK edged up 2.3% during April-June, even though teething problems at its recently-revamped M& weighed heavily on sales performance during the period. Indeed, the company noted that turnover across its Womenswear department was up during the first quarter, with sales of full-price items and seasonal factors helping to drive revenues higher.

Dividend growth back on the agenda

In line with this predicted earnings uptick, Marks & Spencer is expected to lift the payout 4% this year to 17.7p, and an additional 7% rise to 19p is expected in fiscal 2016.

These projections create yields of 4.1% and 4.4% correspondingly, soaring above a forward average of 3.2% for the FTSE 100 and thrashing a relative readout of 2.7% for the complete general retailers sector.

And Marks & Spencer appears to be in good shape to deliver on these estimates. The business boasts dividend coverage of 2 times through to the close of next year — any reading around or above this watermark is generally considered relatively secure — while the firm’s improving balance sheet should also bolster investor confidence. Net cash inflows leapt to £154.3m last year from £67.2m in 2013 due to reduced capital expenditure.

Marks & Spencer still has much work to undertake to be able to lay claim to a meaningful turnaround for its Womenswear department. But any sales recovery here is of course encouraging, while surging progress and planned expansion across its Food division — not to mention its rising presence in lucrative Asian markets and improved online presence — should drive earnings, and thus dividend growth, higher in coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.