3 dividend stock ideas for February – Legal & General Group, British American Tobacco & National Express

Legal & General British American Tobacco National Express

February is here, and as in previous months, there is value on offer for UK dividend investors right now. Many investors are still pretty obsessed with growth at the moment, meaning that value/dividend stocks are being neglected.

With that in mind, today I’m looking at three dividend stocks that I believe offer potential at present. As always, I’ve picked out stocks that not only have high yields, but also have strong dividend coverage and decent dividend growth prospects.

Legal & General Group (LON: LGEN)

Forecast yield FY2018: 6.0%
Dividend cover: 1.5x
Estimated dividend growth FY2018: 6%
Consecutive dividend increases: 7
Forward P/E: 11.0
Strengths: High yield, solid dividend growth track record, low valuation
Risks: Regulation, financial market volatility

If I had to pick one FTSE 100 dividend stock right now, I think I’d go with investment manager Legal & General Group. In my opinion, the stock ticks many boxes from a dividend investing perspective.

For starters, the yield of 6% is one the highest yields in the FTSE 100. Often, a high yield can signal trouble, yet in Legal & General’s case, the business appears to have strong momentum.

The company has also established an excellent dividend growth track record since the Global Financial Crisis. It has increased its dividend seven times since then, and I’m expecting a further dividend hike for FY2017, taking the number of consecutive dividend increases to eight.

Dividend coverage looks solid at around 1.5 times, and the valuation of the stock looks attractive, with the forward P/E a low 11.0 times FY2018 estimated earnings.

Weighing up all these factors, Legal & General remains an excellent income stock choice, in my view.

British American Tobacco (LON: BATS)

Forecast yield FY2018: 4.2%
Dividend cover: 1.5x
Estimated dividend growth FY2018: 8%
Consecutive dividend increases: >10
Forward P/E: 15.2
Strengths: Incredible dividend growth history
Risks: Tobacco regulation

Tobacco manufacturer British American Tobacco has an outstanding dividend growth history. The stock really has been an income investor’s dream over the last 15 years or so, with the dividend increased from 32p per share to 169.4p per share in this time.

Given the consistent dividend growth, BATS shares have often traded at a high valuation, along with an underwhelming yield. For example, in June last year, with the share price above 5,600p, the forward P/E was around 20 and the prospective yield was about 3.3%.

Yet, in the last couple of weeks, as the pound has strengthened, the share price has pulled back a little, pushing the yield up to a more attractive level. We will find out the FY2017 full-year dividend amount when the company reports on 22 February, however, right now, the consensus estimate for FY2017 is 183.9p per share, a yield of 3.9%. For FY2018, the expected payout is 198.9p per share, a yield of 4.2%.

While tobacco regulation does pose a threat to the long-term investment case, British American Tobacco appears to have momentum right now. It is focusing on the growth potential of its ‘Next Generation Products’ and in December, announced that “the business continues to perform well,” and that it is “confident of another year of good earnings growth at constant currency.”

National Express (LON: NEX)

Forecast yield FY2018: 4.0%
Dividend cover: 2.1x
Estimated dividend growth FY2018: 9%
Consecutive dividend increases: 7
Forward P/E: 11.7
Strengths: Strong dividend coverage, low valuation
Risks: Higher fuel costs, capital-intensive nature of the industry

Looking outside the FTSE 100 at less mainstream dividend stocks, I also see considerable appeal in the dividend prospects of international transport company National Express. The company operates bus, coach and rail services across North America, Europe, the UK, Africa and the Middle East.

National Express did cut its dividend back in 2009, yet has since recorded seven consecutive dividend increases, lifting the payout from 6.0p per share in 2010 to 12.3p in 2016. Analysts expect a payout of 13.5p per share for 2017 and a payout of 14.7p per share for 2018, with the latter equating to a prospective yield of 4.0% at the current share price.

Dividend coverage is estimated to be around 2.1 times for FY2017, so there is ample margin for error. A low forward-looking P/E of just 11.7 also adds appeal here. In December, the company noted that it was on track to deliver its profit, free cash flow and leverage targets for the year.

Disclosure: Edward Sheldon, CFA owns shares in Legal & General Group.

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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