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One Footsie dividend growth stock I’d buy and one I’d sell today

Building materials company CRH (LSE: CRH) might not look like a traditional income stock at first glance, but current City forecasts suggest this business is going to grow into one over the next few years.

Indeed according to City figures, over the next two years CRH’s dividend payout to investors is expected to grow by around 10% to €0.75 per share by 2019. But to me, this looks like a conservative forecast given CRH’s management has always prioritised investor returns.

For example, the firm announced today a €1bn share buyback to return additional capital, even though trading during the first quarter has been mixed. Thanks to “prolonged winter weather conditions and the timing of Easter holidays” first quarter like-for-like sales declined 2%. Group earnings before interest tax depreciation and amortisation (EBITDA) are expected to be in line with last year’s print. 

Nevertheless, after this minor setback, management is expecting EBITDA to be ahead of last year in the second half “in the absence of any major market dislocations,” according to its trading update issued today for the three months ended 31 March.

Improving the portfolio 

CRH’s management is always on the lookout for ways to improve performance. Thanks to these efforts, earnings per share have more than doubled over the past six years. And it doesn’t look as if the enterprise is going to slow down anytime soon. 

During the first quarter, the company spent €150m on six bolt-on acquisitions and is planning €1.5bn-€2bn for further portfolio divestments over the “medium term” as the group tries to streamline its portfolio and improve overall returns. While some of this divestment cash will be returned to investors, I believe some will also be invested in new growth opportunities.

Analysts have pencilled in earnings per share growth of 24% of 2018, followed by 15% for 2019. Based on these estimates, the shares are trading at a 2019 P/E of 12.6, which looks to me to be too cheap considering CRH’s historical growth and income potential. The shares currently support a dividend yield of 2.6%.

Steady dividends 

If CRH looks interesting to me, considering the group’s dividend potential, St. James’s Place (LSE: STJ) on the other hand seems to me as if it might be worth selling.

Even though analysts are expecting the company to report earnings per share growth of 74% to 47.7p for 2018, at 23.5 times forward earnings, the shares look cheap. What’s more, the dividend payout of 48.1p per share isn’t covered by earnings per share, which leads me to conclude that the asset manager’s dividend growth might be constrained in the years ahead.

The company does have a history of increasing its dividend — at around 30% per annum for the past five years — but there’s always been more headroom available. For the past five years, the payout cover has averaged 1.5 times.

Still, management is confident that the firm’s offering will continue to attract new customers, driving earnings growth and better dividend cover. In a trading update published earlier this week, management reiterated its belief that St. James’s can continue to grow assets under management by 15% to 20% annually “during 2018 and beyond.” 

If you believe this to be an accurate reflection of the company’s potential, then perhaps the valuation isn’t too demanding.

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Rupert Hargreaves owns no share 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.