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Why these two dividend stocks could be retirement cash cows

Waste management group Biffa (LSE: BIFF) has published its first full-year results since its return to the London stock market in October 2016, after eight years of private ownership.

Revenue excluding landfill tax payments rose by 8.3% to £898.8m last year, while underlying operating profit rose by 18.1% to £73.8m. The figures highlighted the improving profitability of the group’s operations, with Biffa’s underlying operating margin rising from 6.7% to 7.5%.

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Shareholders were rewarded with a maiden dividend of 2.4p per share, giving the stock an initial yield of 1.2%. However, this only relates to the half-year period since the group’s flotation. Consensus forecasts suggest the dividend will rise to 6.7p per share this year, giving a more appealing prospective yield of 3.5%.

A potential cash cow?

It’s this company’s potential ability to produce a reliable stream of surplus cash which attracts me. The group has used a mixture of organic growth and acquisitions to become one of the leading players in the UK waste management sector. Last year’s improved profit margins suggest to me that economies of scale are starting to come through.

My only real reservation is that net debt of £246m still seems quite high to me, relative to the group’s underlying after-tax profit of £35.8m.

However, I think Biffa offers reasonable value on a 2018 forecast P/E of 11, with good potential for long-term dividend growth. I’d consider buying at current levels.

Strong pedigree

Biffa may have potential, but my next stock has a proven record of rising cash returns. Iron casting and machining company Castings (LSE: CGS) hasn’t cut its dividend payout since at least 1998. Indeed, the last 19 years have seen the company’s ordinary dividend rise by 138%, from 5.85p per share to last year’s total of 13.97p per share.

Castings published its 2016/17 results today, confirming previous guidance for a sharp fall in profits. The group’s sales fell 9.8% to £119m, while pre-tax profit fell by 19.3% to £15.9m. Earnings per share fell by 19.7% to 29.8p, leaving the stock on a trailing P/E of 15.1.

Not as bad as it seems

These figures don’t seem great, but the company had already warned that after a “major contract” ended it would take some time for replacement work to be found.

Management appears to have been true to its word. Today’s results confirm that “replacement work has been secured and it is hoped that turnover and profitability will increase back to previous levels during the next two years.”

Customer demand is said to remain “steady” across the business as a whole, although uncertainty relating to Brexit is an ongoing concern. Much of the firm’s output is sold to car manufacturers.

In my view, these risks are worth taking, given the quality of Castings’ finances. Despite the fall in profits last year, the dividend was still covered nearly three times by earnings. Free cash flow remained positive and the group ended the year with net cash of £22.3m, despite paying a special dividend of £13m.

Earnings per share are expected to rise by 14% to 30.7p per share in 2017/18. This puts the stock on a forecast P/E of 14.7, with a prospective yield of 3.1%. In my view, this stock could be an excellent long-term income buy.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Castings. 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.

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