With AstraZeneca (LSE: AZN) having failed to deliver dividend growth on a per share basis in the last five years, income investors may feel it is not an appealing dividend share. However, the company is now expected to generate rising profitability which could lead to a higher dividend.
As such, it could be a worthwhile income share at a time when the State Pension is becoming less desirable as the age at which it is paid increases.
Of course, there are other stocks which could offer improving dividend growth prospects. One example released positive news on Monday, which suggests it could offer high income returns.
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Positive outlook
The company in question is engineering services group Renew (LSE: RNWH). It released a trading update ahead of its annual results, with it expected to report financial performance which is in line with expectations. It has been able to deliver good growth in operating profit, as well as a rising operating margin.
The company’s Engineering Services business is expected to have performed ahead of budget, with its order book having grown and the integration of QTS having moved ahead as planned. In the Specialist Building segment, a focus on selectivity has reduced the level of trading. However, it is expected to remain profitable.
With Renew forecast to post a 12% rise in earnings in the 2019 financial year, its price-to-earnings growth (PEG) ratio stands at just 1. This suggests that it offers a wide margin of safety, while dividend growth could also be on the horizon. With dividends being covered 3.5 times by profit, the company’s yield could move significantly higher from its current 2.8% level.
Changing business
The outlook for AstraZeneca also appears to be appealing from an income perspective. The company’s legacy issues from patent losses are set to continue in the current year, with earnings due to fall by 22%. Next year though, earnings growth of 13% is due to be reported. This has the potential to catalyse dividend growth for the first time in over five years.
In fact, dividends per share are expected to increase by 1.4% in 2019. This puts the stock on a forward yield of around 3.8%. With the potential for further dividend growth due to the investment the company is making in its pipeline, it could offer a higher yield than the FTSE 100 over the medium term. This could attract additional demand for the stock and help to lift its share price.
With AstraZeneca having a relatively defensive business model that is less correlated to the wider economy than many of its index peers, it could offer greater resilience when it comes to the payment of its dividend. Since its dividend cover currently stands at around 1.2, dividend growth could match profit growth over the coming years. As such, now could be the right time to buy it as its financial performance looks set to undergo a transformation over the coming years.
