Tesco (LSE: TSCO) may not be considered a particularly appealing FTSE 100 dividend stock at the present time. The company’s dividend track record is somewhat mixed as it has experienced challenging trading conditions that have put its financial performance under pressure.
Now, though, the business seems to be making encouraging progress with the delivery of its growth strategy. This is expected to lead to an improving dividend outlook. Alongside another FTSE 350 company with dividend growth potential that released news on Friday, Tesco could therefore be worth buying right now.
The stock in question is global engineering company Morgan Advanced Materials (LSE: MGAM). Its trading update confirmed that it is performing in line with expectations, and is on target to meet guidance for the full year.
Sales in the first quarter of the year increased by 2% on an organic constant-currency basis. Margins were slightly ahead of the previous year, benefitting from the leverage of organic growth and efficiency actions.
Looking ahead, Morgan Advanced Materials is expected to post a rise in earnings of 9% in the current year. With a price-to-earnings growth (PEG) ratio of 1.5, it seems to offer good value for money.
In terms of its dividend prospects, the company’s current payout is covered 2.4 times by profit. This suggests that there is scope for a rapid rise in dividends, with its dividend yield of 4.4% likely to become increasingly appealing over the long run. As such, now could be a good time to buy the stock.
As mentioned, Tesco is making progress with the delivery of its strategy. It is now a very different business to that which entered the financial crisis a decade ago, with it becoming increasingly focused on its core operations of being a UK supermarket. This is enabling it to become increasingly productive and efficient, while also improving the customer experience. This could provide it with an increasingly strong position within a highly competitive market.
With dividends having recommenced in the 2018 financial year, the company is now expected to raise them at a rapid rate. In the current year, Tesco is forecast to have a dividend yield of 3.1%. Although this is behind the FTSE 100’s dividend yield of 4.3%, the company is expected to post a rise in earnings of 20% in the current year. This suggests that further rapid dividend growth could be ahead – especially since shareholder payouts are covered 2.2 times by profit.
Since the stock has a PEG ratio of 0.8, it could offer capital growth potential. With a rising dividend, its total returns could be highly appealing, and may allow it to outperform the FTSE 100. As such, now could be a good time to add the company to a Stocks and Shares ISA, with it having the potential to post impressive total returns.
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Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Morgan Advanced Materials and Tesco. 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.