Finding shares which offer a mix of good value and dividend growth potential is never easy. However, with the FTSE 100 trading close to a record high, that task may now be more difficult than ever. Furthermore, investor demand for dividend growth shares seems to have increased in response to higher inflation. That trend could continue over the medium term if, as expected, inflation continues to rise.
However, it is still possible to find shares which are capable of outperforming the wider index. With that in mind, here are two prime examples which could be worth buying right now.
Releasing a trading update on Tuesday was specialist in high performance components for the aerospace, defence and energy industries Meggitt(LSE: MGGT). The company's third quarter revenue growth was flat on an organic basis, which reflected a slower ramp up of new civil programmes. Its customers have indicated that this situation will continue into the fourth quarter.
Looking ahead, the company is on target to meet its full-year guidance. It appears to be performing well despite tough trading conditions. Also announced today was the replacement of its CEO. Stephen Young will step down in April 2018 and will be replaced by current COO Tony Wood. While this adds a degree of uncertainty to the company's outlook, a smooth handover is likely due to the future CEO already being familiar with the group's activities.
Meggitt trades on a price-to-earnings (P/E) ratio of 13.7 at the present time. Alongside a dividend yield of 3.3%, this suggests it offers good value for money. And since dividends are covered 2.2 times by profit, dividend growth could be impressive over the medium term. They could even be ahead of earnings growth without putting the company's financial position under pressure.
Also offering the potential to beat the FTSE 100 is sector peer BAE(LSE: BA). The company has experienced a difficult period in recent years. Cutbacks to military spending during an era of austerity have created challenging trading conditions across the defence sector. This has caused the company's bottom line growth rate to disappoint in recent years.
However, with austerity now apparently on the political backburner, military spending is set to rise. Notably, the Trump administration is pushing for higher spending on defence, and this could catalyse the sector's performance. In fact, BAE is expected to report a rise in earnings of 8% this year, which could be its best performance in over five years.
With the company trading on a P/E of 12.9, it appears to offer good value for money. It also has a good dividend yield, with it currently standing at 3.9%. Since dividends are covered around twice by profit, there could be strong growth in shareholder payouts over the medium term. As such, BAE seems to be a worthwhile buy for the long term.
Peter Stephens owns shares in BAE Systems. The Motley Fool UK has recommended Meggitt. 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.