The FirstGroup (LSE:FGP) share price has flown higher since January 1. It’s an ascent that means dividend yields for the next two years fall below the FTSE 250 average, based on current dividend forecasts.
At 142p per share the dividend yield for this financial year (to March 2024) sits at 2.8%. This is underneath the 3.5% average for FTSE 250 shares.
However, a rapidly improving yield beyond this year suggests FirstGroup shares could be a top pick for investors seeking dividend growth. For financial 2025 and 2026, yields clock in at 3.4% and 3.8%, respectively.
But how realistic are current dividend forecasts? And should I buy the travel titan for my shares portfolio?
Healthy forecasts
The shares aren’t famous for their dividends. Until recently, in fact, the company hadn’t paid any sort of dividend for more than half a decade. This reflected management’s efforts to reduce debt, and then to conserve cash during the pandemic.
However, the sale of almost all its US operations for $4bn in 2021 gave the firm the cash injection to start paying dividends again. It dished out full-year payouts of 1.1p and 3.8p per share in financial 2022 and 2023 respectively.
The rail and bus operator has also used its robust balance sheet to buy back shares. It completed a £75m repurchase programme in recent weeks, and is in the process of buying back another £115m worth of stock.
Perhaps unsurprisingly, City analysts expect annual dividends to grow again this year to 4p per share. And additional meaty hikes, to 4.8p and 5.4p, are forecast for the following two years.
FirstGroup looks in great shape to meet these forecasts and not just because of its solid balance sheet. Predicted dividends are covered between 2.6 times and 2.9 times for each of the next three years. Any reading above 2 times provides a wide margin of error.
Should I buy?
It’s clear that the turnaround here has been mighty impressive. Adjusted profit more than doubled last year, while it ended the 12 months to March with cash on the balance sheet.
But as a potential investor this is of little concern to me. What I’m thinking about is whether FirstGroup can keep this impressive momentum going. And there are two big hazards I think could blow the recovery off course.
One of these the very real threat that more of its rail operations could be nationalised. Its TransPennine Express franchise was taken under government control in May. Its Avanti West Coast is in danger of going the same way when its current six-month contract extension expires in October too.
Then there is the ever-present danger of industrial action. Drivers at its First Bus unit in Manchester are currently taking part in strikes that are set to last into September, in fact. And some of its train drivers will also strike next month in a long-running dispute over pay.
On the plus side, huge investment in areas like electric buses and infrastructure could reap big rewards. But I still believe the risks of owning FirstGroup shares outweigh the potential rewards. I’d rather buy other dividend shares today.
