Finding reliable dividend stocks with good growth potential isn’t easy. In today’s article I’ll ask whether SSE (LSE: SSE), J Sainsbury (LSE: SBRY) or Debenhams (LSE: DEB) could be a smart buy for income investors.
Debenhams
Department store Debenhams shares rose by 4% after its final results were published this morning. However, I suspect the gains were triggered by the news that the firm’s chief executive, Michael Sharp, will be leaving the business in 2016.
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Mr Sharp has come in for heavy criticism from a number of big investors recently, as Debenhams’ performance in recent years has been uninspiring. Many shareholders have felt that the firm has relied too heavily on promotional events to generate sales while cutting profit margins.
This year’s results are in-line with expectations and show that sales rose by just 1.3% to £2,860m, while pre-tax profits were 7.3% higher at £113.5m. Debenhams’ operating margin was 5.7%. This is slightly higher than last year’s 5.4%, but well below the post-2008 average of 7.5%.
Debenhams has left the dividend unchanged at 3.4p for the third consecutive year, giving an attractive yield of 4.0%.
However, a flat dividend for several years is typically a sign of a payout that’s under pressure. Sure enough, this year’s dividend wasn’t covered by free cash flow after debt repayments.
The dividend policy could be tweaked by the next chief executive, but I suspect he or she will focus on boosting earnings, and leave the payout unchanged.
On a P/E of 11.2, Debenhams doesn’t look expensive. Now could be a good time to buy.
SSE
SSE has always been a popular dividend stock thanks to its high yield and its commitment to maintain dividend growth of at least RPI inflation.
Although that promise has come under pressure over the last couple of years, the firm has maintained its dividend policy.
The latest City forecasts suggest the dividend will rise by 2.2% to 90.3p this year, giving a prospective yield of 5.8%. That’s below the 6% level which many investors consider to be a warning of a possible cut.
Market sentiment towards utilities seems to have improved since the summer. Twelve of the eighteen analysts who cover SSE now rate the firm as a hold or a buy, with just 7 rating it as a sell.
My view is that SSE remains a solid income buy for long-term ‘buy and forget’ investors.
Sainsbury
Over the last year, Sainsbury has proved the wisdom of its more upmarket strategy. Customers have not deserted the orange-topped supermarket in the way they have done at Tesco and Morrisons.
Although Sainsbury was forced to slash its dividend following a drop-off in earnings, the new dividend policy of maintaining cover of twice earnings is transparent and makes good sense. What’s more, Sainsbury now offers the highest prospective yield of any supermarket, despite last year’s cut.
This year’s dividend is expected to be 10.5p, giving a potential yield of 4.0%. That compares well to 3.0% at Morrisons and no dividend at Tesco.
Sainsbury also remains the most attractively-valued supermarket, based on forecast P/E and price/book ratio:
|
|
Price/book ratio |
2015/16 forecast P/E |
|
Sainsbury |
0.92 |
12.5 |
|
Morrison |
1.15 |
17.5 |
|
Tesco |
2.50 |
36.6 |
If you’re looking for a UK-focused income buy, Sainsbury could be worth a closer look.
