With the threat of inflation ahead, higher-yielding shares could become increasingly popular during the course of 2017. Reporting today is a company that currently yields 4.3%, which is expected to be well above the 3% inflation rate forecast by the Bank of England in 2017. But is a high yield enough, and does this company pack enough punch when it comes to dividend growth over the medium term?
The company in question is clay brick and concrete products manufacturer Ibstock (LSE: IBST). It released results today which showed that it’s trading as anticipated with adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) in line with expectations. Revenue from clay and concrete products in the UK represents 80% of sales, so its 2% rise in the 2016 financial year was somewhat disappointing. It reflects low-single-digit volume growth for clay bricks and further volume and price growth in the concrete business.
Sales in the US benefitted from a weaker pound and rose by 18%. This reflects a higher average price and the benefits of a more favourable product. Looking ahead, there’s more potential for an uplift from weak sterling, since the prospect of a hard Brexit seems to be increasing. Similarly, with demand exceeding supply in the UK property market, Ibstock’s UK operations could enjoy a relatively upbeat medium-term outlook.
As mentioned, Ibstock currently yields 4.3%. This is higher than the FTSE 100’s yield of 3.6% and with dividends being covered 2.2 times by profit there’s scope for them to rise at a faster pace than earnings. Since the company’s bottom line is expected to increase by 5% this year and by a further 8% next year, there’s scope for its dividend growth rate to easily beat inflation. As such, it appears to offer excellent income potential, especially while its shares trade on a price-to-earnings (P/E) ratio of just 10.5.
A more stable option
Of course, demand for bricks and concrete is relatively cyclical. Therefore, it may be prudent for income seekers who wish to beat higher inflation this year to focus on a more stable and consistent business. One example is Vodafone (LSE: VOD). It currently yields 5.9% and is expected to grow its bottom line by 15% in the current year and by a further 24% next year. This should provide additional cover for its dividend and mean that the potential for an increase grows over the medium term.
In addition, Vodafone’s business model is relatively defensive. Although it’s diversifying into new products such as broadband, it remains a consistent performer as the provision of mobile plans, pay-TV and similar services has historically been something of a quasi-utility. As such, while Ibstock has appeal as an income stock, Vodafone could prove to be more consistent and reliable performer. Alongside its higher yield and stronger earnings outlook, it seems to be the better buy.
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Peter Stephens owns shares of Vodafone. 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.