Many of the shares income-focused investors have traditionally relied on for dividends are now cutting the payout. Shell is a prime example. Across the FTSE 350, established companies’ management has felt the need to preserve cash.
In this environment, and with dividends still an important source of overall returns, I’m turning my attention to two shares that combine income and share price growth potential.
A FTSE 250 growth and income share
Moneysupermarket (LSE: MONY) provides investors with a dividend yield of 3.7%. This was covered by earnings 1.6x, meaning the payout doesn’t seem in immediate danger of a cut. Many other companies have cut the dividends partly because of very low dividend cover, meaning that a hit to earnings severely affected their ability to pay shareholders. Not good news.
Looking more at the growth potential, I see this coming from an improvement in its money division, despite having seen revenues decline. This was due to reduced demand for consumer credit. The lockdown may well have changed that, giving people more time to address their finances.
Between 2018 and 2019, revenue and earnings per share both rose by 9%, while pre-tax profit rose by 10%. This shows the ability of the business to keep growing, albeit not at breakneck speed.
The business is well-established, which partly explains why growth is steady rather than blistering. It’s also highly profitable, which strikes me as a combination that could power future rises in the dividend and the share price.
With the shares now not far off where they started the year, I think now could be an ideal time to buy the shares. Both for the income and the share price growth potential.
A star share from the FTSE 100
Ashtead Group (LSE: AHT) has been a brilliant investment for many years. It’s thought of as a highly cyclical business prone to following the overall stock market’s ups and downs. No surprise then it’s had a tough start to 2020.
Management has been stress-testing the group’s finances. It believes under all the scenarios played out, Ashtead will have positive cash flow. Given a business can’t survive without cash, this is reassuring.
Ashtead is expecting underlying pretax profit for the year ending 30 April to be about £1.05bn, up from £947m a year earlier. The business then is in reasonable shape and highly profitable.
A price/earnings to growth (PEG) ratio of 0.3 indicates the shares have a lot of potential for growth and could be undervalued. The P/E is also under 15, indicating the shares are looking cheap.
The business makes most of its money in the US, so watching what happens there will be key to determining what might happen to revenues and profits.
There’s no doubt this share price is a risk if coronavirus spikes again and the market crashes as a result. However, if the market continues to pick up, the shares provide a growing source of income alongside plenty of upward share price potential.
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Andy Ross owns shares in Moneysupermarket.com. The Motley Fool UK has recommended Moneysupermarket.com. 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.