While dividend growth among many of the largest UK-listed companies is sluggish or non-existent at present, if you turn your attention to the FTSE 250 index, you’ll find an abundance of companies that are growing their dividends at formidable growth rates. Today, I’m looking at two such companies. Could they be the best dividend growth stocks in the FTSE 250 index right now?
Given the low valuations of housebuilding stocks, it would appear that many investors are sceptical of the sector’s prospects. Housebuilding is a cyclical business, and after a strong performance from the sector in recent years, it’s understandable that investors have their doubts over future profitability.
Results from Bellway (LSE: BWY) this morning, however, show no signs of a housebuilding slowdown. Indeed, for the year ended 31 July, it recorded a 10.6% increase in completions to a record 9,644 homes. This impressive performance drove revenues 14.2% higher, and resulted in a 16.2% rise in operating profit. Full-year earnings per share increased 12.7% to 370.6p, enabling the company to increase its dividend by 13% to 122p per share.
Looking at Bellway’s recent dividend history, dividend growth over the last five years has been nothing short of spectacular. It has increased its payout from 20p per share in FY2012, to 122p for FY2017, a compound annual growth rate (CAGR) of an incredible 44%. Does that make the company one of the best dividend growth stocks in the FTSE 250? Yes and no.
While there’s no doubt that a five-year dividend growth rate of 44% is a phenomenal figure, investors should be aware of the company’s long-term history. Looking back a decade ago, when housebuilding slowed down during the Global Financial Crisis, Bellway did cut its dividend, quite significantly, in both 2007 and 2008. That’s certainly something to keep in mind if you’re investing for income, as dividend cuts can be toxic for a portfolio.
Having said that, I see no cut on the short-term horizon as the company has a strong order book of over 5,000 homes, and significant dividend coverage of over three times at present. For now, the 3.4% yield looks safe, in my view.
One company that I do rate quite highly as a FTSE 250 dividend growth stock, is packaging specialist DS Smith (LSE: SMDS).
Over the last five years, DS Smith has raised its payout from 5.9p to 15.2p, a CAGR of 21%. City analysts forecast further growth of 6% and 8% this year and next, with the predicted FY2018 payout of 16p equating to a yield of 3.4% at the current share price.
It’s worth noting that, like Bellway, DS Smith does not have an unblemished dividend growth track record. Indeed, the company halved its payout in 2009. However, there’s two reasons I’d be more comfortable holding DS Smith for its dividends than Bellway.
The first reason is that DS Smith is a more geographically diversified business. The company operates in 37 countries, meaning that it would be less exposed to any domestic slowdown. Secondly, I’m quite bullish on the long-term prospects of the packaging sector, given the rapid growth of online shopping.
DS Smith is enjoying considerable momentum at present, with sales forecast to rise 15% this year. As a result, I’m confident that the company will continue to reward shareholders with dividend growth in the medium term.
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Edward Sheldon owns shares in DS Smith. The Motley Fool UK has recommended DS Smith. 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.