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Is this dividend growth stock a falling knife to catch after dropping 15% today?

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While the FTSE 100 may have reached a record high last week, not all share prices are performing well. There are still difficult trading conditions facing a number of companies. They are causing challenges that are reflected in their financial performance, with profit warnings still occurring and sending share prices lower in some cases.

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Difficult period

The company in question is international performance materials group Low & Bonar (LSE: LWB). The company’s Civil Engineering business experienced difficult trading conditions in the second half of the financial year. Although year-on-year revenue has moved higher, demand for higher value specification products has been subdued. This has resulted in an adverse sales mix. This has meant that the division is not expected to make a profit for the year, with management set to review its future.

Despite this, the company’s other divisions are continuing to perform relatively well. For example, the operational issues in Coated Technical Textiles are now behind the business, while Interiors & Transportation’s solid performance has continued. The company’s Building & Industrial business unit has also performed as expected during the second half of the year.

With Low & Bonar now having a dividend yield of 5%, it appears to offer greater income appeal following its share price fall. Since dividends are covered more than twice by profit, there is still scope for a fast pace of dividend growth over the medium term. Therefore, while its near-term future may be relatively uncertain, it could prove to be a sound buy for investors seeking strong dividend growth stocks.

Dividend growth

Also offering upbeat dividend growth potential is industrial thread manufacturer Coats Group (LSE: COA). The company has been able to post a rise in its bottom line of 60% over the last two years, and this means it now has greater scope to increase dividends at a rapid rate. The company’s dividend coverage ratio is now over four times, and this suggests that it could become a sound income play over the medium term.

Although Coats Group has a dividend yield of just 1.3% at the present time, it is forecast to increase dividends by over 15% in the next financial year. Since its bottom line is due to rise by 10% next year, such a rapid growth in shareholder payouts appears to be highly affordable and does not put the company’s financial future under pressure.

With the company trading on a price-to-earnings growth (PEG) ratio of just 1.8, it seems to have capital growth potential. This mix of improving financial outlook, low valuation and dividend growth prospects could make the stock appealing to investors at a time when inflation is moving upwards and the FTSE 100 is at a record high. As such, now could be the perfect time to buy it.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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