The prospects for Marks & Spencer (LSE: MKS) may seem to be downbeat at present. The company is being beaten by nimbler, more flexible online rivals at a time when customer spending levels are at a low ebb. Therefore, its near-term financial prospects appear to be somewhat challenged.
In the long run, though, the retailer may offer turnaround potential. This could help to improve its dividend growth outlook. As such, it could be worth buying alongside a dividend growth stock which released positive news on Monday.
The stock in question is animal healthcare specialist Eco Animal Health (LSE: EAH). It released interim results which showed a rise in sales of 9% to £31.7m. Its pre-tax profit moved 15% higher to £6.8m, while it was able to deliver a 25% increase in the interim dividend to 4p. Alongside this, it has declared an additional distribution of 3.5p per share.
During the period, the company recorded a recovery in Latin America. It also sought to invest in new routes to market and product development. Demand for Aivlosin continued to grow strongly, while new marketing authorisations were gained in Vietnam, with further authorisations expected in Canada, USA and South East Asia.
With Eco Animal Health forecast to post a rise in earnings of 45% in the current year, followed by additional growth of 11% next year, it could have scope to raise dividends. It has done so at an annualised rate of 22% over the last four years, which suggests that its current dividend yield of 2.4% could become increasingly impressive.
As mentioned, the near-term prospects for Marks & Spencer could be somewhat difficult. Brexit is dominating news headlines at present, and this situation may continue over the coming months. Consumers may therefore decide to hold off on certain purchases, or trade down to no-frills retailers which may offer better value for money. In other words, consumers may become less interested in convenience, quality or the shopping experience, and more interested in price.
Since Marks & Spencer is not a budget retailer, it may naturally experience a slowdown in sales growth. At the same time, it’s being forced to adapt to an increasingly flexible and nimble retail segment which is providing consumers with an extremely impressive level of service. Investment in this area should help the company to become more competitive, but it may take time for it to catch-up to more advanced rivals.
With a 6.7% dividend yield, Marks & Spencer could offer a sound income return in the near term. In the long run, its payout ratio of 72% appears to be affordable, while its investment in online may provide it with a growth catalyst. Therefore, its total return could be impressive in the long run, with it seeming to be a recovery stock at the present time.
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Peter Stephens 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.