With the State Pension likely to prove ineffective at providing a financially-free retirement for many people, dividend growth stocks in the FTSE 100 could become increasingly popular. One company that could offer improving dividend growth prospects is BAE (LSE: BA). Although the defence sector has experienced a difficult period, its outlook could improve as higher military spending seems likely over the coming years.
However, it’s not the only company that could offer impressive dividend growth. Reporting on Thursday was a stock that has a good track record of dividend growth that could continue over the medium term.
The company in question is specialist landscape products company Marshalls (LSE: MSLH). It released interim results on Thursday which showed that it was able to deliver strong revenue growth for the half year despite a severe weather impact. Its operating margins increased by 10 basis points to 13.7%, while recent trading has been especially strong. The integration of CPM Group has continued to be in line with expectations, while return on capital employed for the group has remained relatively high at 20%.
Looking ahead, macroeconomic uncertainty is expected to remain high. This could put some pressure on revenue over the near term, although the self-help measures being taken by the company could help to offset the impact of top-line challenges.
With Marshalls having increased dividends per share at an annualised rate of 18% in the last four years, it has proven to be a solid income stock. Since dividends are still covered 1.7 times by profit, further dividend growth could be ahead over the medium term. This could increase the appeal of the stock, with its 3.3% dividend yield having the potential to move higher in the coming years.
BAE’s dividend growth potential could also be relatively impressive. The company is forecast to post a rise in earnings of 9% in the next financial year, which suggests that demand for its products is on the up. This is not a major surprise, since the US is increasing defence spending under President Trump, with further rises seemingly likely over the next couple of years. This could improve the company’s dividend yield of 3.6% for the 2018 financial year.
Even though the prospects for the defence industry are improving, BAE continues to offer a relatively low valuation. While the FTSE 100 is trading close to a record high, the stock has a price-to-earnings (P/E) ratio of around 15. Given its forecast growth rate next year, this puts it on a price-to-earnings growth (PEG) ratio of 1.9, which could prove to be a fair price to pay given its strong market position and possible tailwind from rising US demand.
As a result, now could be the right time to buy BAE for the long term. The company seems to offer a mix of income, growth and value appeal that could help it to beat the FTSE 100 and provide a boost to investors’ retirement savings.
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Peter Stephens owns shares of BAE Systems. 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.