The cost-of-living crisis poses a huge threat to UK shares across the entire retail sector. And it’s an issue that looks like it isn’t going away any time soon.
British Retail Consortium data this week showed food inflation at 15.4% in May. This was down just 0.3% month on month and just off April’s record highs.
Yet the resilience of the animalcare segment suggests buying Pets at Home (LSE:PETS) could be a good idea. As analysts at Hargreaves Lansdown put it: “No matter what the economic climate, our dogs and cats still need food, and this is one of the last areas people will skimp on when times get tough.”
Record results
Latest financials last week illustrated the robustness of the FTSE 250 firm’s operations. Revenues rose 6.6% in the 12 months to March, to £1.4m. On a like-for-like basis sales were up 7.9% year on year.
Turnover last year hit record levels, as did underlying pre-tax profit of £136.4m. Trading was boosted by the huge popularity of the firm’s VIP loyalty scheme, which added another 400,000 customers last year. This now stands at record highs of 7.7m.
Pets at Home sits at the top of the tree in its specialist market. The business has grown its share by mid-single-digits over the past five years. It’s therefore in prime position to keep growing sales as rising pet adoption rates deliver additional market growth.
The business is targeting annual revenue growth of 7% over the medium term. It expects expansion in its store estate, online improvements, and further growth in its vet business (where like-for-like sales rose 13.4% last year) to drive the top and bottom lines.
It’s aiming to increase pre-tax profits at a compound annual growth rate of 10% over this timeframe.
Dividend growth
Naturally this bright outlook bodes well for dividend payments.
Pets at Home’s exceptional performance in the last fiscal year prompted it to raise the dividend to 12.8p per share. This was up 8.5% year on year and represented an all-time peak.
Current forecasts suggest shareholder rewards will keep rising in the short term too. A 13p per share dividend is anticipated, meaning the retailer sports a healthy 3.6% yield. This beats a forward average of 3.3% for FTSE 250 shares.
Broker upgrades incoming?
City analysts are expecting company earnings to flatline in the current financial year. But given Pets at Home’s consistent outperformance, I think profits and dividend estimates could be in line for juicy upgrades as the year progresses. Pets at Home is no stranger to hiking forecasts.
The petcare firm’s robust balance sheet should also help it to fund more market-beating dividends. In fact its impressive cash generation also encouraged it to launch a £50m share buyback programme last week. This follows a similar level of repurchases completed in the past year.
I think Pets at Home is a great share for investors seeking reliable dividend growth in tough times and I’m considering a purchase in June.
