The trading update released by support services company Compass Group (LSE: CPG) on Thursday showed that it continues to make progress with its strategy. Investors seemed to welcome the release, with its shares rising by up to 5% in its aftermath. With impressive dividend growth prospects, it could become a sound income stock for the long term. However, it’s not the only FTSE 100 company that could do so.
Compass Group was able to generate organic revenue growth in the first three months to 31 December 2017 of 5.9%. This was driven by high levels of new business wins, strong customer retention and impressive like-for-like (LFL) revenue growth. Efficiencies continue to be delivered by the business through its management and performance (MAP) programme. It is also enjoying success in offsetting cost pressures in the UK, with the benefits of many of its initiatives set to be realised in the second half of the year.
In terms of its outlook, the company’s performance in North America is set to remain upbeat. Alongside better-than-expected performance in Europe and the rest of the world, the business is now due to be above the middle of its target range of 4%-6% organic revenue growth for the full year. And with significant structural growth opportunities and the potential for efficiencies in future, the company’s outlook appears to be positive.
With Compass Group forecast to grow its bottom line by 6% in the current year and by a further 7% next year, its prospects appear to be bright. With its dividend being covered 2.1 times by profit, there seems to be significant scope for a sustained and high growth in its shareholder payouts. This means that while it may have a relatively modest dividend yield of 2.4% at the present time, it could become a strong income stock in the long run.
So too could Costa and Premier Inn owner Whitbread (LSE: WTB). It also has a dividend yield which is below inflation at 2.6%. However, it pays out just 39% of net profit as a dividend. This is relatively low and could increase by 50% or even more without putting the company under financial pressure. In fact, over the next two years the company’s dividend payouts are due to rise by around 7% per annum on a per share basis. This is likely to be significantly ahead of inflation.
Of course, Whitbread’s recent update showed that it is experiencing a difficult period at the present time. Lower footfall has caused sales growth to stall at its Costa division, and this trend could continue over the short run as higher inflation causes consumer spending to come under pressure. However, with what seems to be a sound business model that focuses on expansion abroad and efficiency gains, the stock could be a surprisingly strong income play for the long run.
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Peter Stephens owns shares in Whitbread. The Motley Fool UK has recommended Compass Group. 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.