2 hidden dividend-growth stocks on my watchlist today

Updated: 
hostelworld

Having only IPO'd in February, small-cap GBGI Limited(LSE: GBGI) flies under the radar of most investors. However, I've put this company on my watchlist today thanks to its dividend potential. 

GBGI, or to use its full name, Global Benefits Group, is a leading provider of international benefits. In plain English, the company is a provider of insurance products such as life, health, travel and disability. 

Business seems to be going well for the group. For the six months to December 31, the company reported a 12.2% increase in gross written premiums, total revenue growth of 22% and a rise in pre-tax profit of 10.7%. The balance sheet also looks robust with a solvency ratio of 160.6% reported at the end of the fiscal first half. 

It looks as if this positive trading performance has continued into the fiscal second half. According to a trading update published today, for the full year, revenue is expected to be 23% higher year-on-year and the value of gross written premiums exceeds $200m. Based on these early numbers, management plans to announce GBGI's maiden dividend alongside its full-year results, which are set for release in a few weeks. 

City analysts are highly optimistic about the company's dividend prospects. Indeed, an initial dividend payout of 11.2p is projected, which implies a dividend yield of 6.9% based on GBGI's share price at the time of writing. 

Tremendous opportunity 

It is still a relatively small business compared to rest of the global life insurance market. In 2015, the market had total gross written premiums of $2.5trn, so at the current run rate of $200m, the group's market share is less than 0.01%. This means the firm has an enormous runway for growth ahead of it as it captures market share, and that's why GBGI has made it onto my dividend-growth watchlist. 

Cash cow

In my view, the best dividend stocks have strong balance sheets with little debt and plenty of cash as well as a highly cash generative business model. 

Hostel operator Hostelworld(LSE: HSW) ticks both of these boxes. According to the firm's latest set of interim figures, underlying free cash conversion for the period was 101%, meaning that the group converted 101% of adjusted profits to cash -- a superb ratio. What's more, at the end of June, the company's cash balance was EUR17.7m, that's even after paying special and regular dividends worth a total of EUR19.9m for the year ended December 31, 2016. 

After payment of the recommended interim dividend for 2017 (EUR4.9m), the group will have returned EUR32.1m to shareholders over the past two years, 14% of its market value at the IPO.

Management is committed to further cash distributions going forward. Analysts have pencilled in a dividend yield of 3.9% for 2017, rising to 4.1% for 2018. However, considering Hostelworld's cash generation and strong balance sheet, I would not be surprised if these figures turn out to underestimate the company's dividend potential. 

The shares currently trade at a forward P/E of 18.7 and earnings per share are expected to grow by 7% for 2017, followed by growth of 2% for 2018. 

Dividends: The fastest way to a million

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Rupert Hargreaves owns no share 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.