Why I'm considering this dividend-growth stock after today's news
Majestic Wine(LSE: WINE) used to be one of the AIM market's darlings until it hit the rocks last year and plunged into a loss. This prompted a rethink of the high street wine retailer's strategy to a more customer-focused approach, which is costing more, but management believes the additional investment will more than pay for itself over the long term.
And according to a strategy update issued by the firm today, the opportunity to attract new clients is even bigger than the company previously projected.
Investing for the future
Today's strategy update notes that "the opportunity to invest in new customer acquisition is materially bigger than previously thought" and, as a result, the company is planning to ramp up its investment in marketing. It intends to invest an additional £12m in growth, as well as its £12m per annum existing investment. Apparently, each pound invested has a lifetime payback in excess of £4, meaning that each year £48m of future value is banked at the current level of investment.
Unfortunately, even though the higher capital spending is expected to pay off over the long term, it will reduce near-term earnings.
Management believes expenditure will dent earnings in the 2017 financial year to the tune of £3m before "annual generation of future value from £48m to £80m-plus a year." In my opinion, this trade-off is highly attractive. Majestic is investing for the future, which if management figures are to be believed, should result in tremendous returns for its shareholders over the next three to five years.
What's more, investors will be paid to wait for the turnaround. The shares currently support a dividend yield of 1.5%, and the distribution is expected to grow 13% in 2018 and 20% in 2019.
As the investment in future growth filters through to the bottom line, I believe dividend growth will only accelerate. That's why I'm considering this dividend-growth stock after today's news.
Another dividend-growth stock that has recently attracted my attention is Headlam(LSE: HEAD).
Headlam markets and supplies floor covering products, a business that it has fine-tuned over the years. Since 2012, earnings per share have grown at a compound annual rate of 10%, allowing management to adopt a similar rate of dividend growth.
Over the next two years, City analysts expect this trend to continue. The shares currently support a dividend yield of just under 6%, and the payout is expected to grow between 8% and 5% over this period.
Not only does the stock support a market-beating dividend yield, but it also has a cash-rich, debt-free balance sheet, which should encourage further dividend expansion.
And as well as its dividend potential, shares in Headlam currently appear undervalued, as investors remain cautious around the outlook for the UK retail industry. The stock currently trades at a forward P/E of 10.1, a valuation that, in my view, more than reflects current retail industry uncertainty and could lead to a substantial re-rating if the firm performs better than expected.
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.