Why I’d buy this income stock despite its sliding revenue

Finding companies that offer a high yield as well as dividend growth potential is never an easy task. However, Morgan Advanced Materials (LSE: MGAM) offers just that, with today’s update from the industrial company showing that it offers significant capital gain prospects too.

Morgan Advanced Materials’ performance since its half year has been in line with expectations. Although year-to-date sales on a constant currency basis were 1.9% lower than in the first nine months of last year, the company’s long-term outlook remains positive. Key to this is an improved financial standing following the raising of new debt which extends the company’s debt maturity profile.

The performance of its various divisions in the first nine months of the year was somewhat mixed. Sales for the Thermal Products unit were 0.3% lower in the period than in the same period of the prior year. They were negatively impacted by a decline in the Americas that offset strong performances in Asia and Europe.

Meanwhile, the firm’s Carbon and Technical Ceramics ops recorded a fall in sales of 3.6%, with declines across all of its business units. And with sales in the Composites & Defence Systems division being flat during the period, the overall top line performance of Morgan Advanced Materials was somewhat lacklustre.

However, it’s forecast to grow its bottom line by 8% in the next financial year. This puts it on a forward price-to-earnings (P/E) ratio of only 12.1, which indicates that it offers good value for money. Furthermore, Morgan Advanced Materials has a yield of 4.2% from a dividend covered 1.8 times by profit. This indicates that there’s scope for the company to raise dividends at a rapid rate – especially with its upbeat bottom line forecast.

A better long-term pick

Clearly, Morgan lacks the stability and resilience of other popular income stocks such as British American Tobacco (LSE: BATS). The tobacco industry is extremely stable and British American Tobacco’s earnings are utility-like in terms of their consistency.

However, Morgan offers a higher yield than British American Tobacco, with the latter yielding 3.6% from a dividend covered 1.5 times by profit. Therefore, while Morgan’s risk is higher than British American Tobacco, its income return offers greater potential reward.

Despite this, British American Tobacco remains the better income play right now. As well as stability, it has the potential to rapidly grow its bottom line thanks to its exposure to the e-cigarette space. This could transform the company’s earnings since the fact that e-cigarettes are far less harmful than traditional cigarettes means that the number of smokers (including e-cigarette smokers) may remain stubbornly high.

Coupled with population growth, this could lead to rising demand for British American Tobacco’s products, which would then translate into higher earnings and a rapidly rising dividend. Therefore, despite Morgan’s income appeal, British American Tobacco offers better long-term dividend potential.

But is British American Tobacco a match for this stock?

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Peter Stephens owns shares of British American Tobacco. The Motley Fool UK has recommended Morgan Advanced Materials. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.