Balfour Beatty plc Set To Reinstate Dividend (And Rival National Grid plc And Centrica PLC Once More?)

Today’s results from construction and support services company Balfour Beatty (LSE: BBY) show that it is making progress following its major restructuring in 2014.

Although it remained a loss-making entity in 2015, this reflected historic projects and the company now has a higher quality order book with a strong pipeline of opportunities. A key reason for this is more favourable markets which are enabling more selective bidding to take place.

Looking ahead, Balfour Beatty appears to be confident in its long term future, so much so that it plans to reintroduce a dividend in the current financial year. While this is likely to be a relatively modest payout, it could be the start of a rapid rise in dividends over the medium term, since Balfour Beatty is forecast to deliver impressive profit growth.

For example, its bottom line is expected to turn from red to black next year and then grow by 46% in the 2017 financial year. Were it to pay out a rather modest 50% of profit as a dividend, Balfour Beatty would offer a yield of 3.6% in 2017, which could make it a relatively appealing income play. And with the company’s order book being strong, its profitability could continue to rise given the upbeat outlook for the UK economy.

Other Options

Of course, Balfour Beatty remains a relatively risky play, since its turnaround is only partially complete. As a result, income-seeking investors may wish to stick to more reliable and defensive income stocks such as National Grid (LSE: NG), which remains one of the most stable stocks within the FTSE 100 and offers a yield of 4.6%, as well as a beta of just 0.61. This indicates that its shares should be far less volatile than the wider index which given the uncertain outlook for the FTSE 100, could be a major advantage.

Furthermore, National Grid is likely to raise dividends at a faster rate than inflation. That may not sound like such a coup while inflation is near-zero, but after having such a loose monetary policy for so long, the UK could experience a much higher level of inflation over the coming years. With National Grid’s dividend being covered 1.4 times by profit, it appears to have sufficient headroom to deliver upbeat dividend growth.

Also offering greater income appeal than Balfour Beatty at the present time is Centrica (LSE: CNA). Clearly, it offers less stability than National Grid, but with Centrica undergoing a major transformation it is set to become a much lower risk business over the medium term. That’s because it is seeking to dispose of a number of oil and gas assets, with it set to become a more focused domestic energy supplier. This should cause its profitability to be rather more consistent and less reliant upon a higher oil price for growth.

With Centrica currently yielding 5.5% from a dividend which is covered 1.25 times by profit, its income prospects appear to be very healthy. Although dividend growth may be somewhat slow in the coming years, as Centrica executes an ambitious plan to transform its business model, cost savings of £750m should aid profitability and mean that dividend growth is strong in the long run.

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Peter Stephens owns shares of Centrica and National Grid. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.