2 dividend-growth stocks with takeover potential

Updated: 
Esure

Shares in motor insurer Esure(LSE: ESUR) have charged ahead of the wider market over the past year, gaining nearly 40% excluding dividends year-to-date. And this morning, the shares have added another 6% after a report published over the weekend suggested that the insurer's biggest shareholder, Peter Wood was looking to sell his 30.8% stake in the firm.

This report has sparked speculation that Esure could fall prey to a larger peer after Wood offloads his stake. 

According to the Sunday Times, which broke the story, Wood has already been approached by other insurance company bosses about a potential deal, and he believes he can have a deal in place by next month. 

Chances of a takeover

It's hardly surprising that Esure is being touted as a potential takeover target. The company is on track to nearly double revenue over the space of seven years, from £512m in 2012 to an estimated £900m for 2018. That said, profit during this period has remained stable. 

Still, the company has proven itself as a dividend champion since its IPO in 2013 having paid out 55p per share in regular and special dividends since 2013, around 18% of its IPO price. Analysts have pencilled in a dividend payout of 12.5p for 2017, giving a dividend cover ratio of 68%. Esure's interim results showed that at the end of the first half the company had a solvency coverage ratio of 153%, indicating that the firm's balance sheet is strong enough to support further generous payouts. 

Esure's strong balance sheet and record of steady cash distributions makes the company an attractive target for both peers and investors alike. While you should never buy a company just because it's a rumoured takeover target -- in case the deal never materialises -- as a standalone business, Esure is an attractive investment in its own right. 

With a prospective dividend yield of 4.7% and forward P/E of 14.7, the company looks like an attractive income and growth play to me at current levels. The prospect of a takeover is just a bonus. 

Dividend growth 

Shares in challenger bank Aldermore Group(LSE: ALD) have struggled to gain traction this year, falling 6% excluding dividends. However, while the shares have struggled, the underlying business has continued to expand. 

During the first half of the year, the company reported a 17% rise in operating income to £150m year-on-year and the bank's tier one capital ratio rose 30 basis points to 11.8%, 20 bps below management's 12% target required for dividend payments. For the full year, analysts have pencilled in projected earnings per share growth of 23%. 

At its current rate of growth, management expects Aldermore's capital ratio to hit 12% by the end of the year. Based on this forecast, City analysts believe the bank is on track to pay a maiden dividend of 2.9p per share to investors for 2017. Next year, the payout could rise even further with analysts projecting a total full-year payout of 7.8p, giving an estimated dividend yield of 3.5%. 

Aldermore has also been touted as a potential takeover target thanks to its steady growth, cash generation and valuation. It may only be a matter of time before a suitor emerges as right now, Aldermore looks to be a cheap income and growth stock. At the time of writing, the shares are trading at a highly attractive 7.1 times forward earnings. 

You can't live without dividends

Research has shown that over the long term, dividends account for more than half of investment returns.

To help you find the best income plays, our analysts have recently put together this brand new free report, which is packed full of wealth-creating tricks as well as dividend stock tips.

The report is entirely free and available for download today. If you're looking for tips on how to boost your portfolio's performance, this guide is invaluable. 

Rupert Hargreaves does not own shares in any stock mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.