The ability of a company to grow its dividend payments could become increasingly important over the coming years. Inflation is already at 3% and with Brexit less than 18 months away, uncertainty surrounding the UK’s economic outlook could increase. This may weaken sterling and push the price level higher at an even faster rate.
Therefore, Shell‘s (LSE: RDSB) forecast growth rate for dividends could be a clear catalyst to push its share price higher. As well as this, the company appears to offer improving operational prospects as well as a low valuation.
Rising dividends
The recent update from Shell showed that its medium-term outlook is better than previously expected. It anticipates that free cash flow will increase to between $25bn and $30bn by 2020. This is $5bn higher than the previous estimate and could mean that the business has scope to pay a higher dividend to its investors.
Furthermore, the oil price has moved higher in recent months. This could act as a further catalyst on the company’s financial performance and ability to pay a higher dividend. Since the company is also seeking to reduce its leverage, it may also become a lower risk and more sustainable business. This could make the reliability of its dividend much higher and lead to a premium valuation being placed on the company.
Valuation
With Shell trading on a price-to-earnings growth (PEG) ratio of 1.6 and having a dividend yield of around 6%, it appears to offer excellent value for money. It also seems to be improving its business model to some extent. Asset disposals may create a more streamlined and efficient business that is better able to deliver sustained profit growth in future. And with a dominant position in LNG (liquefied natural gas) following the BG acquisition, the company’s outlook appears to be bright.
Dividend growth potential
Also offering scope for a rising dividend is the UK’s largest listed residential landlord Grainger (LSE: GRI). It released a strong set of full-year results on Thursday, with adjusted earnings increasing by 40% and its net asset value per share rising by 5.6%. It continues to see significant growth opportunities for the private rented sector, with it having secured £651m of opportunities under its current strategy.
Although Grainger has a dividend yield of 1.7% at the present time, its shareholder payouts are covered over three times by profit. This suggests that dividend growth could be high over the medium term, with investor payouts set to increase by over 15% in the current financial year.
Certainly, the outlook for the UK property market may be somewhat uncertain. However, Grainger has a dominant position within the industry and with demand expected to remain robust for rental properties as house prices continue to move higher, the company appears to have significant total return potential in the long run. As such, now could be the perfect time to buy it.
