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One stunning dividend-growth stock I’d buy alongside Tesco plc

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FTSE 100 supermarket giant Tesco (LSE: TSCO) isn’t a company you’d always think of as a dividend growth stock.

But the Hertfordshire-based group’s turnaround status means that it’s still in the process of rebuilding its dividend payout, after profits crashed in 2015. By accepting a lower yield today, we may be able to lock-in higher yields in the future.

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In contrast, the second stock I’m covering today is very much in growth mode. Results out today show a 14% increase in earnings per share last year. However, shares in this successful group don’t come cheap. Is it worth paying a premium for this quality business?

1-0 to Tesco

Tesco’s recent deal to acquire wholesaler Booker Group means that the supermarket will expand its grip on the fast-growing convenience store market. It will also become one of the UK’s largest food suppliers to the restaurant trade, opening up a new route to growth.

Booker chief Charles Wilson will take control of Tesco’s UK business when the deal completes. He’s widely expected to succeed turnaround boss ‘Drastic’ Dave Lewis at some point in the future.

If this view is correct, I believe it will be good news. Mr Wilson is widely credited with rescuing Booker when it was close to failure. He went on to turn it into a stellar growth story whose shares have risen tenfold over the last 10 years.

The Booker sale is expected to leave Mr Wilson with a £240m shareholding in Tesco. This would align his interests with those of shareholders in a way that few other FTSE 100 executives can manage.

A strong outlook

Tesco’s earnings per share are expected to rise by 28% during the 2018/19 financial year, which starts on 1 March. The shares trade on a forecast P/E of 15 and offer a prospective dividend yield of 2.4% for this period.

I expect profit margins to rise for a little longer yet, lifting earnings faster than sales. In my view, now could be a good time to add Tesco stock to a long-term income growth portfolio.

Precision engineering

Shares of FTSE 250 engineering group Spectris (LSE: SXS) rose by more than 3% this morning, after the firm issued a better-than-expected set of 2017 results.

Group sales rose by 13% to £1,525.6m, while adjusted earnings climbed 14% to 145.1p per share, beating consensus forecasts of 132.3p per share.

The dividend rose by 9% to 56.5p per share, coming in ahead of an expected figure of 54.6p.

Why I’d buy

This company’s instrumentation and control products are used in industries as diverse as gold mining, automotive engineering and food production. These products are sold through a range of specialist brands and are often unrelated, but their underlying purpose is always to improve customers’ productivity.

In today’s increasingly automated industrial world, my guess is that demand for Spectris’s products is likely to continue growing. The company itself should also be able to continue expanding through small, specialist acquisitions.

Broker forecasts put the stock on a forecast P/E of 18 for 2018, with a prospective yield of 2.2%. Spectris could be more vulnerable in a recession than Tesco, but my hunch is that this quality business will continue to thrive over the long term.

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Roland Head has no position in any of the shares mentioned. 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.

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