Lloyds (LSE: LLOY) is set to become an increasingly popular income option over the medium term. With inflation rising to 2.7% last month and forecast to move higher, its dividend yield of over 5% could become more attractive for investors.
Looking ahead to next year, Lloyds is expected to increase dividends per share by 15%. This puts it on a forward dividend yield of 5.8%, which is 200 basis points higher than the FTSE 100’s dividend yield. Since dividends are forecast to be covered twice by profit, there seems to be scope for further rapid growth in shareholder payouts over the medium term.
Alongside a price-to-earnings (P/E) ratio of just 10, this could make Lloyds a hugely desirable stock for the long term. However, there could be another company which offers a potent mix of income potential, growth prospects and value appeal at the present time.
While the UK consumer outlook is somewhat uncertain, pub operator Greene King (LSE: GKN) seems to have a relatively sound strategy. It is in the process of integrating Spirit into its business, reporting in February that over 1,000 pubs have now been converted to the ‘best of both’ Pub Company IT systems. Ongoing synergy savings are also being realised. This could provide Greene King with a cost advantage versus its industry rivals.
As well as this, Greene King is delivering a major disposal programme. It has sold 59 pubs already in the current financial year, with a further 50-60 set to be sold prior to the end of the year. This will generate cash proceeds of up to £75m in total, which could be used to invest in refurbishment, new technology or even in pricing.
With Greene King having a yield of 4.6%, it offers an income return which is 80 basis points ahead of the FTSE 100. Since its dividends are covered 2.1 times by profit, they seem to be highly sustainable at the current level. In fact, if UK consumer spending declined due to higher inflation, Greene King could realistically maintain its current payout over the medium term without putting itself under financial strain.
Looking ahead, dividend growth of 5% is expected next year, which could improve demand for the company’s shares. Although inflation is set to move higher in 2017/18, few forecasts predict that it will reach 5%. This is likely to make Greene King’s dividend growth rate positive in real terms.
With a P/E ratio of just 10.2, Greene King appears to offer upside potential. As mentioned, the outlook for the UK consumer may be challenging as a result of rising inflation. However, with synergies coming through, an asset disposal programme which could bolster the company’s cash position, dividend growth potential and a low valuation, Greene King appears to offer an enticing risk/reward ratio.
Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.