Admiral Group (LSE: ADM) is currently one of the two dividend stocks that form the backbone of my portfolio.
The reason why I like this company is simple, it is a cash cow. Since the beginning of 2005, one share in the group has yielded a total of 941p in dividends. This works out at 275% of the initial share price of 342p on January 1 that year.
And I see no reason why this trend cannot continue. Management aims to pay out around 45% of earnings to investors via a regular dividend with any extra cash returned via a special payout every year. For example, the last interim payout in 2017 was made up of a 37.9p per share regular dividend, and an 18.1p special. Every year since 2005 Admiral has paid a special and regular distribution to investors.
City analysts are expecting shares in the company to yield 5.3% for 2017, and 5.5% for 2018. Both of these figures include special dividends.
Even though Admiral has proven itself to be an income champion over the past decade, it has lacked growth. Since 2013 earnings per share have only expanded by a tiny 5.7%.
However, the firm is investing heavily in its overseas operations, which are currently proving to be a drain on profits, but when these businesses stop bleeding red ink, the sky could be the limit for the group. Indeed, the opportunity for Admiral’s overseas business is enormous. For the year to June 2017, the number of international customers using the firm’s services rose 27% to just under 1m.
As this global business grows, along with Admiral’s existing UK business, I believe the dividends should continue to flow.
Growth through acquisitions
My second top income pick for 2018 is Air Partner (LSE: AIR). It is currently in the middle of a transition. The company used to be a pure jet broker, but management is now diverting excess funds into buying new businesses, which are more stable. Jet brokering can be a cyclical business, especially private jet brokering where Air Partner specialises. Nonetheless, profit margins are wide so the group has been able to generate plenty of cash to reinvest in the business.
The group’s latest deal is the acquisition of air traffic control services provider SafeSkys Ltd, which should help underpin stable long-term growth. Following this, and other significant purchases last year, City analysts are expecting Air Partner’s earnings per share to jump 22% for the year to 31 January. A 5.8% increase in the full-year dividend is expected to give a yield of 3.9%.
Worth a premium
The one downside is that shares in the company currently trade at a premium valuation of 17.6 times forward earnings. Although considering the firm’s double-digit earnings growth rate, and its acquisition strategy, I believe that this looks too expensive. If management can continue to make sensible acquisitions and return cash to investors, over the next few years shares in Air Partner could really take off.
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Rupert Hargreaves owns shares in Admiral Group and Air Partner plc. 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.