Today I’ll be taking a closer look at two companies with excellent potential for growth that also provide healthy dividend income. Would it be wise to invest in these companies right now, or should you wait for a better entry point?
Too cheap to ignore?
Multinational support services and construction company Interserve (LSE: IRV) has demonstrated an excellent track record of growth in both revenues and profits stretching back well over a decade. But unlike many of its growth-focused small-cap brethren, Interserve hasn’t neglected its investors. The company has been paying out rapidly rising dividends for a good number of years. I think the firm has struck a good balance retaining over 50% of earnings for future expansion, while rewarding shareholders with the rest.
This means the dividend coverage has always been easily affordable at well over twice underlying earnings, and with the firm’s history of growth I see no reason why shareholders shouldn’t continue to be rewarded handsomely for their ongoing loyalty. The Reading-based firm has enjoyed a strong rally since July following a share price slide that began in June last year and that saw the shares fall from highs of 660p to five-year lows of just 232p during the summer.
Interim results last month showed the company is making good progress in reducing debt levels as it looks to exit from the lossmaking Energy from Waste business. A return to growth is expected in 2017 with analysts talking about a 7% improvement in earnings coupled with further increases to the dividend, which now yields 6%. Despite the recent rally, the shares are still trading 25% lower than a year ago and are simply too cheap to ignore with a forward P/E rating of just six for 2017.
Spain trounces UK
The UK’s largest van and commercial vehicle hire company Northgate (LSE: NTG) reported a mixed bag of results for its last full financial year as it was hit by a weakening of the euro and changes in vehicle depreciation rates. Full-year results for fiscal 2016 revealed lower pre-tax profits of £77.6m compared to £83m reported a year earlier, despite a £4m improvement in revenue to £618.3m.
It was a tale of two halves for the Darlington-based firm, as Spanish operations outperformed the UK division with customer numbers in Spain up 16% during the year and the number of closing vehicles on hire up from 35,600 to 35,700. Meanwhile in the UK, the average number of vehicles on hire was 3% lower with the number of closing vehicles down to 45,700 from 48,600 a year earlier, as the firm reduced the number rented to non-business users in a bid to improve returns.
Northgate’s shares are changing hands at well below 2015 highs of 653p and trading on a single-digit earnings multiple of just nine for each of the next two years. Dividends have been growing year-on-year since 2012 and are covered almost three times by earnings, leaving plenty of room for future growth. At current levels of just 420p, and a prospective dividend yield of 4%, Northgate remains a good long-term buy for a healthy balance of growth and income.
