At the time of writing, shares in British Gas owner Centrica (LSE: CNA) support a dividend yield of 6.1%, which is one of the highest in the FTSE 100.
However, while this level of income looks attractive, I think income investors should avoid the business altogether, and buy Compass (LSE: CPG) instead.
Two very different businesses
These two companies couldn’t be more different. Centrica operates some of the UK’s critical power infrastructure, while Compass is a global catering business. They also look different from an income perspective. Shares in Compass currently support a dividend yield of just 2.1%, which pales in comparison to Centrica’s 6.1%.
That said, when it comes to dividend quality, I think Compass stands head and shoulders above its FTSE 100 peer. For a start, the group’s per share dividend payout is covered 2.1 times by earnings. Centrica’s distribution is only covered 1.4 times by earnings per share.
What’s more, the Compass dividend has grown at a compound annual rate of 7.3% over the past six years, in line with earnings growth. Centrica’s dividend has only shrunk over the same period. From 17p per share in 2013, it’s slated to pay out just 5.1p for 2019, a decline of around 70%. Over the same time frame, Centrica’s earnings per share have slumped from 27.6p to 6.8p.
Not going to end
In my opinion, this trend isn’t going to come to an end anytime soon. Centrica is facing a buffeting from all directions. Increasing competition, regulators’ demands and political threats are all eroding the firm’s bottom line. Unless there’s a sudden change in the market environment, management is limited in what it can do. Cost cuts have helped slow the decline, but they’ve also hurt customer services, which has only accelerated a customer exodus.
On the other hand, Compass is flying high. For the past decade, the firm has been pursuing a strategy of using its cash flows from operations to buy up smaller peers in the highly fragmented global catering market.
Management has proven itself to be extremely adept at buying and integrating businesses in this way, and I reckon this can continue for some time. Indeed, analysts project the global catering market is expected to be worth more than $205bn by 2024, that’s compared to the group’s 2019 revenues of around $30bn.
The bottom line
So overall, while Compass might not offer the highest dividend yield in the FTSE 100, I’m excited by the quality of the group’s payout and its long-term growth potential.
Centrica might offer a higher yield right now, but looking at the firm’s track record, it seems to me it’s only a matter of time before the payout is cut once again. That’s why I’d sell Centrica today and buy Compass instead. I believe the latter offers a better all-round package for investors.
Income-seeking investors like you won’t want to miss out on this timely opportunity…
Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!
But here’s the really exciting part…
Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...
He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.
With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.
Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Compass Group. 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.