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Have £5k to spend? A FTSE 250 dividend growth stock I think could boom in August

WH Smith (LSE: SMWH) isn’t having things all its own way. An increasing reluctance from shoppers to part with their cash is adding to the sales pressure at retailer’s long-troubled high street stores. Because of this, I’m not expecting a standout set of results when the  group unveils pre-close trading details on August 28.

That’s not to say I don’t think the FTSE 250 firm could prove a cracking buy right now, however. I’m expecting more signs of margin progression at these troubled stores but this isn’t why I think it could rise. Indeed, I reckon more great news surrounding its Travel division could be in the offing.

Its programme of store openings and outlet expansion in airports and train stations the world over has truly turbocharged revenues of late. Indeed this strategy, combined with the acquisition of US electronics retailer InMotion (a move which doubled the size of its footprint outside the UK), drove Travel revenues 26% higher in the 11 weeks to May 18, according to most recent financials.

Moving into America

It’s no surprise WH Smith is adding aggressively to its global store network. Traveller numbers through the world’s major airports and other significant travel hubs are surging, bringing with them booming demand for confectionary, magazines and all sorts of other travel aids.

Last year, the business added more than 50 travel outlets to its British portfolio, bringing the total to 867, and increased its overseas network spanning Europe, Asia, Australia and the Middle East by a similar number to 286.

WH Smith has also identified the US as the next important step for its growth strategy, hence its move for InMotion late last year. And what an acquisition it’s likely to be — its stores can be found in 22 of the busiest 25 airports in the States, and in 43 aviation hubs in total.

Dividends set to soar

It’s little wonder, then, that despite the prospect of ongoing sales stagnation for its High Street unit, Smith’s annual earnings will keep growing for some time yet. Those aforementioned Travel outlets generate a share under two thirds (or 63% to be exact) of trading profits at group level after all, so this shouldn’t come as a shock.

That said, the cost of heavy investment in its global store network means solid rather than spectacular profits rises of 7% and 9% are predicted for the fiscal years ending August 2019 and 2020, respectively.

However, what this does mean is WH Smith — which raised the full-year dividend a chubby 12% to 54.1p per share last year — is predicted to keep raising payouts at a healthy rate. Rewards of 57.7p and 63.1p are predicted for this fiscal period and the next, resulting in inflation-beating yields of 2.8% and 3%.

In my eyes, WH Smith offers the perfect blend of earnings growth and dividend expansion for long into the future. And yet its current price doesn’t quite reflect this, as illustrated by an undemanding forward P/E ratio of 18 times.

I reckon the retailer is worthy of a serious re-rating by the market and next month’s pre-close statement could well provide the fuel for such an occurrence.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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.