Big dividend yields in the very near future? Or the prospect of sustained dividend growth in the years ahead? This is one of the dilemmas I am exploring in this article and I am asking whether is Whitbread (LSE: WTB) or Centrica (LSE: CNA) the superior income stock.
Watch out
A look at Centrica shows why, even though dividends have fallen twice during the past five years and been frozen at 12p per share for the past three fiscal periods, it remains a popular pick for glass-half-full investors. The City is expecting payouts to remain stable around this level in 2018, resulting in an 8% dividend yield.
I’m afraid to say, though, that such a colossal yield isn’t enough to draw me in given the massive long-term uncertainty still hovering over the business.
Today, Centrica’s share price surged as Ofgem announced that power suppliers will be unable to charge dual-fuel households that pay by direct debit more than £1,136 per year.
Investors breathed a sigh of relief as the cap matched the market’s expectations. While reassuring, however, today’s news is no reason for share pickers to break out the bubbly. Ofgem is likely to keep a close eye on the returns that Centrica et al provide to their shareholders, and further action cannot be ruled out down the line should accusations of rip-off charges persist.
What’s more, the prospect of nationalisation should Jeremy Corbyn’s Labour Party secure the next general election adds another layer of danger to the FTSE 100 business.
Irrespective of additional regulatory action, I believe Centrica is already a risk too far given the rate at which it is losing customers. Last month’s decision to hike its standard variable rate would have likely gone down like a lead balloon with its customers and with more and more households feeling the pinch, such measures are only likely to add to the exodus.
I’m not tempted to touch the British Gas operator with a bargepole right now, in spite of its monster dividend yields and low valuation, a forward P/E rating of 12 times.
Smell the coffee
I believe that income chasers scouring the Footsie would be better served by investing in Whitbread instead.
As I intimated at the beginning of the piece, yields at the Premier Inn owner aren’t in the same ball park as those of Centrica. For the year to February 2019 a 104.3p per share dividend is being suggested by City brokers, a figure that creates a solid-if-unspectacular yield of 2.2%.
However, I would consider Whitbread to be a better dividend choice than the energy play. While I am backing its exciting global expansion programme to keep driving profits, and thus dividends, higher at a spritely rate, I don’t see Centrica raising its own shareholder payouts any time soon. Indeed, I believe that the business may struggle to keep the dividend on hold as currently projected, given its poor dividend coverage (of 1.1 times) and its hulking debt pile.
Conversely, not only is Whitbread’s balance sheet strong enough to support further dividend growth, but the additional capital boost created by the £3.9bn sale of Costa Coffee to Coca-Cola enhances the possibility of payout projections surpassing forecasts.
A forward P/E ratio of 17.9 times makes Whitbread a bit of a bargain given its growth and dividend outlook, in my opinion.