With Tullow Oil (LSE: TLW) not expected to pay a dividend this year, its appeal as an income stock may appear limited. While that’s true in the short run, over the medium-to-long term, Tullow Oil has the potential to become a strong income stock due to anticipated increases in its production and profitability.
Notably, Tullow Oil is expected to benefit from its Project TEN in Ghana coming on-stream within a matter of months, with this having the potential to transform its output. The impact on its bottom line is expected to be significant, with the company forecast to return to profitability in the current year and then increase its net profit by 233% in 2017. Due to this rise in earnings, Tullow is expected to recommence dividends next year.
Looking further ahead, the company is likely to enjoy strong cash flow due to its higher profitability and also because it’s set to focus increasingly on production rather than exploration. As such, it could prove to be an enticing income play, although with the oil price being volatile it offers less stability than many other higher yielding stocks.
Long-term income appeal
Similarly, Clarkson (LSE: CKN) currently yields a below-average 2.9%, but like Tullow Oil it has considerable dividend growth potential. The integrated shipping services specialist is forecast to increase its bottom line by 20% next year and with dividends due to be covered 2.1 times by profit, there seems to be significant scope for a sustained increase in shareholder payouts over the medium-to-long term.
Furthermore, Clarkson seems to offer excellent value for money at the present time and looks set to reverse its 6% share price decline of the last year. That’s because it trades on a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that it has value, growth and long-term income appeal.
Future income play
Meanwhile, B&M (LSE: BME) has been a rather disappointing performer in the last year, with its share price declining by 12%. That’s despite its bottom line having a very bright medium-term future, with the discount retailer expected to increase its earnings by 22% in the current year and by a further 17% next year. This puts it on a PEG ratio of 1, which shows that there’s clear capital gain potential on offer.
In spite of its share price fall, B&M still offers a rather disappointing yield. It stands at just 2.1%, which is only just over half the yield of the FTSE 100. However, a key reason for this is that B&M pays out just 40% of profit as a dividend. Looking ahead to next year, dividends are due to rise by almost 17%, which provides evidence that B&M could gradually become a worthwhile income play if its profit growth remains relatively high.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.