Most investors know and understandably love companies such as Rightmove or Auto Trader that offer high growth, astronomical margins and plenty of potential for stellar returns in the long run. But these aren’t the only two companies fulfilling these criteria.
Boring but dependable
One big growth dividend stock that offers all these characteristics is self-storage business Big Yellow Group (LSE: BYG). Its growth credentials are solid, having increased sales and earnings per share every year since going public in 2008 on the back of expansion across the UK and strong occupancy rates as a generation of renters find themselves with too many objects and not enough space to store them at home.
The beauty of running a self-storage business is that as long as occupancy rates remain high, and they were a very good 75.5% in Q3, operating margins are impressive as each location requires very few employees and running costs are incredibly low. Indeed, in the first half of the financial year EBITDA margins were 67% and the business kicked off £28.9m in operating cash flow on £54.8m in revenue.
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Now, free cash flow, which accounts for capital expenditure, was significantly lower in the period as £21m was spent on purchasing four new sites to expand the estate to 73 stores. But for dividend investors this shouldn’t be much of a worry as the company’s REIT status and healthy balance sheet meant management still increased interim dividend payments by 11.5%.
Analysts are forecasting a similar rise in full-year dividends and are predicting a payout of around 27.57p per share this time. This would work out to a very healthy 3.4% yield that is well covered by growing earnings and would mark the seventh consecutive year of dividend increases.
The downside is that the company’s shares are much loved by investors and trade at a premium valuation of 22 times forward earnings. Although the business has good cash flow, solid growth prospects and a hefty dividend yield, I’ll be waiting for a more sane valuation before jumping in and buying its shares.
One word: plastics
Another highly cash generative, growing business that is paying out a very nice dividend is plastics manufacturer Victrex (LSE: VCT). The company’s high tech plastics have been a hit with smartphone makers, aeroplane manufacturers and automakers seeking to trim weight and improve durability.
The popularity of these efficiency gains is clear in the results for the six months to March, in which revenue rose 12% year-on-year to £130.9m. A unique product and high barriers to entry for competitors mean plenty of pricing power, with healthy operating margins of 38% in the half and an increase in net cash to £86m at period end.
This level of cash is an important milestone as it clears the £85m threshold at which management will consider a special dividend of at least 50p per share. Last year the company paid out a normal dividend of 46.82p per share for a yield 3%. So if full-year dividends rise in line with interim payouts and a special dividend is awarded, shareholder could be looking at a yield of around 5.8% at the current share price.
With very impressive growth prospects, good margins, bumper shareholder returns likely and a reasonable valuation of 19 times forward earnings, now may be a good time to take a closer look at Victrex.
