At a time when many companies are struggling to grow earnings and to deliver serious dividend increases, Banco Santander (LSE: BNC), ITV (LSE: ITV), Burberry (LSE: BRBY), WPP (LSE: WPP) and Ashtead (LSE: AHT) offer outstanding prospects on both fronts.
Banco Santander
Headquartered in Spain, familiar on UK high streets and with a strong presence in Latin America, Santander is looking an increasingly sound proposition for investors today. That’s because, having struggled to maintain a high dividend for many years after the financial crisis, management finally bit the bullet and decided to reduce the dividend, as well as raising fresh capital to strengthen the balance sheet.
Santander is expected to post double-digit earnings growth this year and next, giving an undemanding price-to-earnings (P/E) ratio of 12.2, falling to 11.1. And, although the dividend has been reduced, the current year’s prospective yield is a healthy 3% (covered 2.7 times by forecast earnings), a level from which strong, sustainable growth can be delivered.
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ITV
ITV has been growing earnings strongly for a number of years, a trend that is set to continue, with forecast double-digit rises this year and next. The stock trades on something of a premium P/E — 17.4, falling to 15.9 — but the earnings growth, strong cash generation and plans for balance sheet leverage suggest the company could be worth its above-average earnings multiple.
As part of its balance sheet strategy, ITV has already paid a substantial special dividend, which may not be the last. Meanwhile, management has committed to 20% increases in the ordinary dividend this year and next, which will see a forecast 2.1% yield rise to 2.6%.
Burberry
Iconic British fashion house Burberry saw a challenging external environment last year, which has continued so far this year. Low single-digit earnings growth has been, and currently is, the order of the day, but analysts are forecasting a return to double-digits next year, bringing a P/E of 20.2 down to a still-premium 18.3. However, I’d argue that Burberry’s brand strength around the world merits a high rating along the lines of other global brand powerhouses, such as Unilever and Diageo.
As a bonus, Burberry is in the process of progressively increasing its dividend payout ratio to 50%, giving a prospective yield of 2.4%, rising to 2.7% next year (13% dividend growth) — with a further year or two of bonus growth (i.e. on top of earnings increases) before the target ratio is reached.
WPP
Global advertising giant WPP is expected to continue its strong record of earnings growth, with 9% increases forecast for this year and next; giving a P/E of 15.9, falling to 14.5. The valuation looks by no means excessive for a world leader and consistent performer.
Like Burberry, WPP is looking to reward shareholders by paying out a higher proportion of earnings as dividends. Management has already increased the payout ratio from 40% to 45%, and is currently considering whether to raise the ratio further. As things stand, the prospective dividend yield is 2.9%, rising to 3.2% next year, but I wouldn’t be surprised to see WPP move to a 50% payout ratio, bumping the yield up further.
Ashtead
Ashtead is one of the world’s biggest equipment rental firms, with national networks in the UK and US. Earnings have been growing frighteningly fast, as the company has benefitted from a multi-year construction boom. Forecast growth may not be quite as spectacular as in the early years of recovery, but most companies would kill for analyst expectations of 24% this year and 18% next year. Cyclical companies may not merit premium P/Es, but Ashstead’s 13.6, falling to 11.6 looks rather generous.
As a cyclical company with a policy of delivering progressive dividend growth across the cycle, Ashtead’s payout ratio is cautiously low — currently running at less than 25%. The prospective yield is 1.7%, rising to 1.9% next year. However, these figures could be a little higher, because they’re premised on analyst forecasts that imply a payout ratio of nearer 20%, which seems a bit too conservative to me.
