These 2 income stocks could double their dividends

The Motley Fool
Pendragon - Aston Martin
Pendragon - Aston Martin

Leading hard landscaping manufacturer Marshalls(LSE: MSLH) is topping the FTSE 250 leaderboard today after the company issued a trading update. Management also announced the acquisition of CPM Group Limited, a pre-cast concrete manufacturer specialising in underground water management solutions.

It looks as if this market champion is showing no signs of slowing down, and I believe the company could be a great income buy for investors.

Growth through acquisitions

The acquisition of CPM Group for £38.3m seems to be a prudent decision by management. It was established in 2004 and reported revenue of £51.2m and profit before tax of £4.6m in the financial year ended 31 December 2016. The company is involved in some major UK infrastructure projects such as Hinkley Point and HS2, which displays the quality of the firm's work and its reputation.

For 2016, Marshalls reported a group profit before tax of £46m, so this deal should boost pre-tax profit by around 10%.

Based on this deal, I believe that the company is now on track to beat City earnings forecasts for the full year. Analysts had been expecting earnings per share growth of 12% for 2017. As there are only a few months left of the year, I don't believe CPM will be significant for the fourth quarter, but it might move the needle. More of an impact will likely come through next year. Analysts had been expecting earnings growth of 7% for 2018 but this now seems conservative.

Shareholders come first

Over the past five years, Marshalls has grown its earnings per share by 290%, and over the same period, the group's dividend distribution to investors has more than doubled.

And there's room for further payout growth. Marshalls' current dividend (2.5% yield) is covered twice by earnings per share. According to my figures, assuming that the company can repeat its performance of the last five years, and at least double earnings per share, the payout could hit 22p, giving an estimated yield of 4.7%.

Poor market sentiment

Shares in motor deaerl Pendragon(LSE: PDG) have gone nowhere this year. However, the company's underlying business has continued to perform. For the six months to the end of June, pre-tax profit expanded 12.7% year-on-year and earnings per share rose 18.2%.

For the full year, City analysts have pencilled in growth of 2%, which isn't that exciting, but it's still positive. Despite this positive growth, the shares trade at a bargain multiple of only 7.3 times forward earnings. In my opinion, this valuation does not make much sense as the company is still growing and has a net debt-to-EBITDA level of less than one.

Shares in Pendragon also support a market-beating dividend yield of 5.3%, and there's room for further payout growth. The payout is covered 2.6 times by earnings per share, and the firm is throwing off cash.

During the first half, debt was cut from £140m to £92m thanks to strong cash flows, even after including the impact of the dividend and the company's share buyback.

Overall, Pendragon looks to me to be undervalued, and a cash cow with room for further dividend growth as well as additional share buybacks.

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Rupert Hargreaves owns shares in Pendragon. The Motley Fool UK has recommended Pendragon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.