Overcoming high inflation has historically been one of the most challenging aspects of investing. Not only does it reduce the real return on income, it can also negatively affect the profitability and share price performance of a range of companies. As such, buying stocks which have the capacity to pay increasing dividends and to also deliver consistent real profit growth could be a sound strategy. Here are two companies which could offer both of those qualities in the long run.
Reporting on Wednesday was UK and European industrial property investor, Hansteen Holdings (LSE: HSTN). The company’s first-half results showed record profits, with profits rising by 185.6% on a pre-tax basis. This enabled the company to increase its interim dividend by 4.5% so that it now has a forward yield of 3.4%.
Since dividends are covered 1.2 times by profit, there seems to be significant scope for further above-inflation increases over the medium term. This is in addition to the £580m which is set to be returned to shareholders by the end of 2017 following the sale of the company’s Dutch and German portfolio for €1.28bn.
Encouragingly, Hansteen has seen a rise in its property valuation of 2.3% during the period. It is also seeing strong occupier demand, which has resulted in an increase in rent per let sq ft. Looking ahead, this trend is set to continue and, with there being constraints to new supply, there is a strong possibility of further yield compression in future. This could increase the value of the business and potentially lead to a higher rating as well as a firmer share price in the long run. This could help the company’s investors to counter the effects of inflation over a sustained period.
The idea that Royal Mail (LSE: RMG) has growth potential may seem unlikely to many investors. After all, its Letters business in particular is experiencing a difficult period. However, its international operations are growing rapidly and are gradually becoming a more central part of the business. In time, they could even dominate the company’s earnings, which may help it to outperform a range of other stocks in terms of profit and share price growth.
As well as upside potential, Royal Mail also offers sound income prospects. It has a dividend yield of 6% from a payout which is covered 1.6 times by profit. This suggests that strong dividend growth could be ahead – even if there are further problems within its UK divisions.
Certainly, Royal Mail has a degree of political risk and uncertainty from the threat of nationalisation, but given its high income return and international growth opportunities, its risks seem to be balanced out by high potential rewards. Therefore, it could be a sound means of overcoming inflation in 2017 and beyond.
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Peter Stephens owns shares of Hansteen Holdings and Royal Mail. The Motley Fool UK has recommended Hansteen Holdings. 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