I’m convinced that Connect Group (LSE: CNCT) has what it takes to dole out abundant dividends in the near term and beyond as rising demand for its parcel freight services, combined with the results of vast restructuring, underpin strong profits growth.
Although Connect is expected to endure some trouble in the near term (a 16% earnings drop in the year to August 2017 is currently estimated), the City still expects the firm to lift last year’s 9.5p per share payout to 9.8p per share.
And this comes as no surprise as this year’s bottom-line reversal is anticipated to be nothing more than a blip in Connect’s long-running growth tale. Indeed, the firm is expected to get back in gear with a 6% earnings recovery in fiscal 2018, in turn supporting a 10.1p reward.
As a result, Connect boasts bumper yields of 7.9% and 8.1% for this year and next.
While dividend coverage may fall narrowly short of the safety-benchmark of two times and above, at 1.7 times and 1.8 times for 2017 and 2018 respectively, I reckon Connect’s robust balance sheet — boosted by the imminent divestment of its Education & Care operations — should soothe any nerves over these projections being met.
Marked down
I am far less optimistic about the investment outlook for Marks & Spencer Group (LSE: MKS) however, as the strains created by rising inflation on consumers’ purses dent demand for the firm’s failing fashion products even further.
It has thrown the kitchen sink at injecting life its Womenswear division but to no avail, the company failing to respond to the challenge brought by established operators like Next as well as the new kids on the block like online operator ASOS.
M&S toppled from one-year highs late last month after advising that revenues from its Clothing and Home sales fell 2.8% in the 12 months to March. This caused pre-tax profits to plunge 64% to £176.4m.
Meanwhile, news from the Office for National Statistics that retail sales grew 0.9% in May — the slowest rate of growth since April 2013 — added to fears that Marks & Spencer may struggle just to stand still in the months and years ahead.
Fragile forecasts
Many dividend hunters may be tempted in by predictions of handsome dividends by the City’s army of analysts. Although the firm is predicted to hold the dividend at 18.7p per share for a second successive year in the period to March 2018, this forecast still yields an über-generous 5.5%.
And the yield steps to an even-better 5.6% for next year thanks to an expected 19p dividend.
But share pickers need to take such projections with no little caution, in my opinion. A predicted 7% bottom-line decline in fiscal 2018 means that the dividend is covered just 1.5 times by projected earnings, and coverage remains at this level in the following period.
And the strong likelihood of Marks & Spencer’s profits problems extending into 2019 and beyond means that the business may have no choice but to pull the plug on its generous dividend policy. I reckon the risk to income investors far outweighs the prospect of meaty returns.