If you’re looking for safe and steady stocks with the ability to churn out inflation-beating dividend growth, where should you start?
Today I’m going to look at two potential choices, starting with supermarket group Wm Morrison Supermarkets (LSE: MRW) whose sales rose by 2.8% during the first quarter.
A solid performance
Morrison’s like-for-like (LFL) sales excluding fuel rose by 3.4% during the first quarter. Total sales growth excluding fuel was lower, at 2.8%, as a result of last year’s store closures.
The group says that inflation played some part in pushing up sales revenue, due to higher prices. However, today’s statement confirmed that “LFL volume was again positive”. This means that Morrison is selling more goods than it did one year ago from the same stores.
That’s good news for shareholders. My only slight concern is that the firm didn’t provide a breakdown of the split between sales growth and inflation-led price growth. So it’s hard to be sure how much of the group’s LFL sales growth is down to increased volumes.
Inflation-beating income?
Morrison’s stock still looks quite fully priced, on a forecast P/E of 19.4 and with a prospective yield of 2.5%. However, the group’s dividend was covered by both earnings and free cash flow last year, which also saw net debt fall from £1.7bn to just £1.2bn.
Dividend growth of 17% is forecast for 2017/18, with an 8.5% increase pencilled-in for 2018/19.
I believe there’s considerable scope for Morrison’s dividend to grow ahead of inflation over the coming years. It might be worth accepting a lower yield now in order to benefit from future dividend growth.
This could be profitable
Newly-merged Ladbrokes Coral Group (LSE: LCL) has combined two of Britain’s best-known high street bookmakers. This deal creates two big opportunities, in my view. The first is that the combined group should benefit from a larger-scale platform for online growth. The second is the chance to cut costs and combine operations on the high street.
Today’s first-quarter update suggests to me that both of these opportunities will play an important role in the firm’s future. Although the group’s total net revenue rose by 5%, retail revenue from the firm’s UK stores fell by 2% during the quarter. This fall was offset by a 22% increase in online revenue, highlighting the importance of this sector.
Jim Mullen, Ladbrokes Coral’s chief executive said that overall trading for the first quarter was in line with expectations. That puts the stock on a forecast P/E of 11 for this year, with a prospective yield of 3.7%.
I believe this stock could offer a decent opportunity for income seekers willing to accept some risk. While Ladbrokes Coral needs to repay some of the £1.1bn net debt resulting from the merger, the group has historically been fairly cash generative. I think management should be able to offset high street declines by focusing on providing an improved, digital-led service to its customers.
If I’m right, then Ladbrokes Coral could offer a decent long-term income opportunity.