With many FTSE 100 stocks offering yields of 5% and 6% or more, investors may turn their noses up at those paying more modest dividends. Yet it is often worth accepting lower-income prospects in return for potentially higher growth. Does that apply with these three?
BT Or Not BT?
I recently described BT Group (LSE: BT-A) as one of the unsung heroes of the FTSE 100 but its income stream isn’t quite so gallant, yielding a timid 2.68%. Few investors will be complaining, especially given five-year share price growth of 188% and management’s spirited display in taking on Sky Sports’ Premier League coverage. Sky looked to have footie rights all sewn up until BT’s match-winning intervention.
BT is taking a similar tilt at the fast-growing quad-play combined digital TV, broadband, landline and mobile market, through its ÂŁ12.5bn purchase of EE. That hefty price tag is largely being covered by stock, which means BT should have enough in its coffers to keep up the pressure on Sky. Earnings per share are forecast to fall by 3% next year but revive in 2017, growing a forecast 7%. BT’s bold attempts to grab share in two major markets should leave investors optimistic of more growth to come.
Drinks Drive
Global drinks giant Diageo (LSE: DGE) yields a less than intoxicating 3% but at least it is neatly covered 1.6 times. The company’s dividends have disappointed for years yet management has been more progressive than you might think, lifting the dividend from 40.4p in 30 June 2011 to a forecast 58.23p in June 2016. That is a rise of 44% over five years. During the same time, the share price rose 61%.
The share price growth number is slightly flattering as it is largely a hangover from the glory growth years under former chief executive Paul Walsh. Over the last three years, the share price is up just 4%, against 10% across the FTSE 100. Current chief Ivan Menezes has raised been selling off non-core assets as he looks to build a smaller core portfolio. This is the reverse of Walsh’s acquisition spree, and like Menezes’ “Drink Better” premium brands strategy, it doesn’t seem to hold such exciting growth prospects. More conservative attitudes to drinking could point to a tougher future for the group.
Grub Up, Clothing Down
The low yield isn’t the only concern for investors in Marks & Spencer (LSE: MKS), its perennially out-of-season clothing division has been a worry for years. Food glorious food has helped lift the share price 36% in the last five years, but that still feels disappointing, especially given the dowdy yield of just 2.14%.
Marks’ recent half-year results show that once again, food has outperformed general merchandise. The company is leading the way in one market, where it understands what aspirational customers want, while trailing embarrassingly in the latter, where it doesn’t. Clothing margins may improve now chief executive Marc Bolland’s pricey overhaul of the company’s sourcing and distribution network is complete but until management works out how to woo the fashion-conscious young, I will let the stock stay on the shelf. Especially at 16.39 times earnings.