Shares in support services company Carillion (LSE: CLLN) are up by over 4% today after it released an upbeat pre-close trading update and announced £1bn in new deals. Crucially, Carillion is on track to meet its expectations for the full-year. While the company’s management team remains cautious, it’s seeing signs of improvement – especially in the UK.
Encouragingly, Carillion now has a pipeline of contract opportunities that’s expected to increase to over £41bn in value. And with it having a high level of revenue visibility for 2016 of 80%, Carillion is moving into next year in a stronger position than for some time. This should provide the market with a degree of confidence in its future potential and could prove to be the start of a gradual upward rerating to its valuation.
On this front, there’s tremendous scope for improvement. Carillion currently trades on a price-to-earnings (P/E) ratio of just 9.2 and while earnings growth in the low single-digits over the next couple of years is rather pedestrian, the long term prospects given an improving UK economy mean that it appears to merit a higher valuation.
In addition, Carillion currently yields a whopping 5.7% and with dividends being covered 1.9 times by profit, there’s vast scope for a rise in shareholder payouts in 2016 and beyond. That makes Carillion a very enticing income play at the present time.
The empire strikes back
Similarly, Imperial Tobacco (LSE: IMT) also holds huge dividend appeal. Its shares yield 4.4% at the present time and with this being more than 10% higher than the wider index’s yield, Imperial remains a relatively desirable income play. Allied to a high yield is a bottom line that’s due to rise by 10% next year, offering significant scope for a rising dividend over the medium term.
Imperial also has a relatively modest payout ratio given its status as a mature company operating in a mature industry. In fact, it pays out just two-thirds of profit as a dividend and this provides it with tremendous scope to deliver rapidly rising shareholder payouts in 2016 and beyond.
Take a second look
Meanwhile, Tesco (LSE: TSCO) doesn’t appear to be appealing from an income perspective at first glance. Its shares yield just 0.3% and even though dividends are due to more than treble next year, this still leaves Tesco with a prospective yield of just 1.1%. That’s lower than the rate of inflation and lower than the best savings accounts – even on a net basis.
But beyond next year Tesco has the potential to become a relatively appealing income stock. That’s partly because it’s due to have a payout ratio of only 18% even after next year’s planned dividend hike. This means it could afford to raise dividends at a much faster rate than profit growth in the coming years.
Not that profit growth prospects look weak. Tesco has huge potential due to a refreshed strategy and an improving UK consumer outlook that could boost the company’s financial performance. And, with Tesco’s bottom line expected to rise by 78% next year, the impact of those factors could come a lot sooner than was expected earlier this year.