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Why I’d buy and hold shares in this dividend growth stock forever

Image source: Getty Images.

Shares in Photo-Me (LSE: PHTM) are sliding this morning after the company issued a profit warning for 2019. According to the trading update, while 2018 is going to plan, restructuring costs are expected to weigh on growth in 2019.

Management is undertaking a restructuring of the group’s Japanese photobooth business. This division is currently performing below expectations thanks to a surge in competition following the launch of the Japanese government’s My Number ID card programme.

However, according to Photo-Me’s update, “this card programme is not compulsory and has not gained the momentum photobooth operators initially anticipated.” So the company is now reconsidering its position in the Japanese market and looking to “invest in a thorough restructuring of its Japanese subsidiary.” Restructuring will weigh on profits while under way, but it is “expected to boost profitability in FY19 and beyond.

After factoring in these costs, management believes that profit before tax for the year ending 30 April 2019 will be at least £44m, which is “likely to be at a similar level to [the] financial year ended 30 April 2018.” 

Time to buy? 

Photo-Me’s growth stumble is disappointing, but I believe that despite this setback, the stock remains an attractive income play for investors. 

After today’s decline, the shares support a dividend yield of just under 6% and this morning’s trading update notes, “although no final decision has yet been made, the board currently expects that it will maintain the group’s existing dividend policy.” So it looks as if the payout is here to stay. With net cash of “approximately £26m” at the end of April, Photo-Me certainly looks to have the resources to maintain the dividend at its current level. 

And when the company does return to growth, I expect it to return to its dividend growing ways

Over the past six years, it has increased its dividend at an average rate of 23% per annum, from 2.5p to an estimated 8.4p for 2018. With this being the case, I believe today’s declines could be a great opportunity to snap up shares in the dividend growth champion. 

Strong and flexible 

With its “strong and flexible” business model, IRN-BRU maker A.G. Barr (LSE: BAG) is also on my dividend growth stock radar. 

What I like about A.G. Barr is the group’s defensive business model and its strong cash generation. For fiscal 2018, net cash jumped 50% to £15m even though the firm spent £17m on dividends and £8.5m buying back stock during the year. I expect the soft drinks manufacturer to report a similar performance for fiscal 2019, generating more cash to support the dividend and underpin dividend growth. Indeed, as my Foolish colleague Kevin Godbold recently pointed out, it looks as if there’s nothing visible on the horizon to suggest that dividend growth will falter.

The one downside is that shares in A.G. Barr are relatively expensive. At the time of writing the stock trades at a forward P/E of 20.8 and the dividend yield is a lowly 2.4%. That being said, in my view, this is a price worth paying for one of the most defensive stocks on the market today. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended AG Barr and Photo-Me International. 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.