Shares in Halfords (LSE: HFD) have risen by over 7% today after it released an upbeat trading update. Group like-for-like (LFL) sales increased by 2.6% in the 11-week period to 1 April, with the company still expecting to deliver pre-tax profit of between £78m and £82m for the full year.
Although Halfords experienced a small decline in parts, accessories and clothing for its cycling division during the period, this was offset by a second consecutive quarter of growth in sales of bikes. And with motoring sales growing versus tough comparatives and Halfords’ autocentres achieving a 10th consecutive quarter of LFL growth, its overall performance was relatively strong.
With Halfords currently yielding 4.1%, it appears to have appealing income prospects. Furthermore, with the company’s dividends being covered 1.9 times by profit and earnings due to rise by 6% next year, there seem to be upbeat prospects for brisk dividend increases over the medium term. And with Halfords trading on a price-to-earnings (P/E) ratio of just 12.7, it seems to offer good value for money on both a relative and absolute basis.
Solid bet
However, Halfords lacks the stability of a number of other FTSE 350 income plays. For example, National Grid (LSE: NG) offers a higher yield of 4.5% and is much more stable and resilient. That’s simply because of the industry within which it operates, with National Grid having a very dependable business model and a high degree of revenue visibility.
Furthermore, National Grid’s dividends are relatively well-covered, with profit covering them 1.4 times. This shows that while National Grid’s dividend growth could lag behind Halfords, it should at least keep pace with inflation over the medium term and offer a real-terms rise in income for the company’s investors. And with interest rate rises set to be very slow in the coming years, National Grid may not see investor sentiment decline hugely as a result of its high debt level and higher costs associated in servicing those debts when interest rates rise.
Income choice
Also offering a sound income future for its investors is Royal Mail (LSE: RMG). It has a yield of 4.7% and with dividends being covered 1.7 times by profit, there’s clear scope for increases in shareholder payouts in future years. Although Royal Mail is undergoing a rather challenging period regarding its letter delivery division, its European operations continue to offer growth and its parcel delivery division remains relatively impressive on its long-term outlook.
With Royal Mail trading on a P/E ratio of 12.2, it offers slightly more scope for an upward rerating than Halfords. While its business model may not be as stable as that of National Grid, it seems to be more resilient than Halfords. For this reason, as well as its higher yield and lower valuation, Royal Mail could prove to be a better income buy than Halfords for the long run. That said, the latter still seems to offer a very sound future for income-seeking investors.
