This week has been all about global inflation expectations. They have contributed to a global sell-off in shares which has caused the FTSE 100 to slump. Of course, higher inflation in the UK has been present for a number of months. Weaker sterling caused by uncertainty following the EU referendum has contributed to a faster-rising price level.
In such a scenario, a company with dividend growth potential such as Shell (LSE: RDSB) could be a worthwhile purchase. However, it’s not the only dividend-growth share that could be worth a closer look.
Reporting on Wednesday was specialist supplier of colour cosmetics and owner of the W7 brand Warpaint (LSE: W7L). It announced that it has continued to perform as per previous expectations, with the integration of Retra having been completed. The business unit is performing well, with a new managing director and finance director having been appointed in December. With new opportunities and synergies expected to be realised from the acquisition, the company’s prospects for 2018 appear to be bright.
In the current year, the company’s bottom line is forecast to rise by 28%, with further growth of 23% expected next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.6, which suggests that it could deliver a rising share price over the same time period.
A fast-rising bottom line could also stimulate the shareholder payouts made by Warpaint. The company’s dividend is due to rise by 65% between 2017 and 2019, which puts it on a forward dividend yield for 2019 of 3.1%. With dividends due to be covered 2.4 times by profit, further income growth could be ahead over the long term.
Of course, Shell remains one of the most enticing income stocks in the UK stock market. It currently has a dividend yield of 5.8%, and there is scope for rapid growth over the long run. While there has been a view in recent years that the company’s dividends are unsustainable, that looks set to change. In the 2019 financial year, the stock is expected to have a dividend coverage ratio of 1.4. This suggests that it could afford to pay out a higher proportion of profit as a dividend without hurting its financial strength.
Certainly, the performance of the oil price will have a significant impact on Shell’s profitability and on its ability to pay a higher dividend. But with the prospects for oil being more positive now than they have been in a handful of years due to rising demand and supply cuts, the company’s potential as an income stock remains high.
With free cashflow forecast to rise and debt levels on the decline, Shell appears to be a sound income option for the long run. And with inflation potentially moving higher across the world, it could be an appealing stock from an income perspective.
Peter Stephens owns shares in Shell. The Motley Fool UK has recommended Royal Dutch Shell B. 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.