When it comes to looking for stocks with the potential to produce a second income, the FTSE 100 is full of potential buys, in my opinion. Two of these businesses, in particular, stand out to me right now, Morrisons (LSE: MRW) and Mondi (LSE: MNDI).
Between 2014 and 2017, Morrisons had a rough time as the group struggled to compete against the rise of discounters Aldi and Lidi which ravaged the whole UK supermarket industry.
These discounters are still growing, but Morrisons’ new management has managed to steady the ship by doubling down on what it does best, offering excellent quality food at attractive prices (new partnerships have also helped return the company to growth).
As customers have returned, the group’s sales and profits have both returned to growth. After falling to a low of £16.1bn in 2016, Morrisons reported sales of £17.7bn in fiscal 2019, up nearly 10% in just a few years.
Meanwhile, after falling into the red in 2014 and 2015, the company is now back in the black and analysts are expecting it to report a net profit of £333m for fiscal 2020. Analysts have pencilled in earnings per share of 14p, up 26% year-on-year.
A return to profitability has also allowed Morrisons to reintroduce its dividend. After eliminating the payout to shareholders in 2016, management tentatively introduced a small distribution in 2017 and have increased the payout over the past two years.
A jump in earnings per share will, analysts believe, allow the company to pay a total dividend of 9.6p per share for the current financial year, giving a dividend yield of 4.9%.
On a cash basis, it looks to me as if this payout is here to stay. Last year, the business generated £281m in free cash from operating activities after deducting capital spending and other items, just about covering the total cost of the dividend for the year (£289m).
So, that’s why I think you can trust Morrisons to give you a second income for many years to come.
The other FTSE 100 income stock I like the look of is Mondi. This paper and packing company has fallen out of favour with the market recently due to concerns about the possible oversupply of the global cardboard market. If there is too much supply, it will push down worldwide paper and pulp prices, which will have a knock-on effect on Mondi’s earnings.
Based on this speculation, City analysts are forecasting a 10% decline in the company’s earnings per share for 2019. However, even after factoring in this decline, shares in Mondi still look cheap. After recent declines, the stock is trading at a forward P/E of just 10.5, below its five-year average of around 15.
On top of this attractive valuation, the company’s dividend yield has spiked to 4.2%. As the payout is covered 2.3 times by earnings per share, I reckon earnings could fall by as much as 50% before the dividend comes under threat.
As the company has a long-established track record of increasing its dividend to shareholders (the payout has grown on average by 15.6% per annum for the past five years), I reckon it’s highly likely the payout will only continue to expand over the next few years.
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.