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Are Dividends At National Express Group PLC, Diageo plc And UBM plc About To Explode?

Shares in transport operator National Express (LSE: NEX) have soared by over 9% today after it released a positive set of results for the 2015 financial year.

Scope for increases

Revenue increased by 3.8% at constant currency, while normalised pre-tax profit was up by 29.3%. This has allowed the company to increase its dividend payout by 10% to 11.33p per share, which puts it on a yield of 3.5% at its current share price.

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Looking ahead, there is further scope for rapid increases in dividend payments, since National Express continues to enjoy significant contract wins, as well as recording rising revenues, profits and margins in every one of its divisions in 2015. This, plus a dividend coverage ratio of 2, indicates that shareholder payouts have tremendous scope to increase over the medium term, with earnings growth of 12% forecast for next year also likely to allow for double-digit dividend rises moving forward.

With National Express trading on a price to earnings (P/E) ratio of 13.7, it appears to offer good value for money given its bright prospects and upbeat performance. As such, it seems to be worth buying –especially for income-seeking investors.


Also reporting today was media company UBM (LSE: UBM), which said it performed well during what proved to be a transformational year in 2015. It included the proposed disposal of PR Newswire for $841m, as well as the acquisition of Advanstar. Furthermore, UBM says it is making good progress with its Events First strategy and this has been at least partly responsible for improved margins, as well as contributing to a rise in total adjusted operating profit of 31%.

With dividends increasing by just 1.4%, UBM may appear to be a rather unlikely income play. However, its shares currently yield a very enticing 3.7% and with dividends being covered 1.6 times by profit, more rapid dividend rises in future are a possibility.

That’s especially the case since UBM appears to have a sound strategy which is expected to contribute to an increase in its earnings of 15% next year. This should enhance the potential for a dividend increase and with a special dividend of £245m due to be paid in the near term from the proposed disposal of PR Newswire, now could be a good time to buy UBM for its income prospects.

Significant headroom

Meanwhile, Diageo (LSE: DGE) also appears to be a sound long term income play. It may only yield 3.1% right now, but with the beverages company’s bottom line due to rise by 8% in the next financial year, it has the potential to increase dividends at a brisk pace. This prospect is further enhanced by the fact that dividends are covered 1.5 times by profit, which affords Diageo significant headroom when making payments to its shareholders.

With Diageo’s wide range of premium drinks brands, it would not be a major surprise for it to become a bid target. Clearly, there is no guarantee of that happening, but with a diverse geographic footprint which is set to benefit from growth in demand from developing nations in the coming years, Diageo’s P/E ratio of 21.2 could move substantially higher.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Diageo and UBM. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.