Motley view - BUY1 Apr 2017 22:23
Trading at a discount
Pets at Home (LSE: PETS), the UK’s largest pet supplies retailer, has seen its share price fall 22% since the start of the year. This drop has left its shares changing hands at just 12.2 times its consensus forecast for full-year underlying earnings per share of 15.6p. That’s a significant discount to the sector average of 15.4 and its 3-year historical average of 16.8.
The sharp valuation compression of its shares is down to the weakness of the company’s merchandise sales in recent months. Like-for-like merchandise sales fell 0.5% in the third-quarter, down from growth of 1.7% last year. However, despite this, management still expects to be able to meet full-year profit expectations, as service revenues continue to grow robustly.
Looking forward, the group expects services — such as veterinary practices and dog grooming — rather than merchandise to be the main engine of growth, as it faces growing competition from supermarket and discount stores, which have been expanding their pet-product offerings. Revenues from services rose 47.8%, to £26.3m, in the third-quarter, with like-for-like growth of 7%.
City analysts project earnings per share will continue to climb, hitting 15.6p in 2017. With higher profits, this should mean dividends will likely grow this year too. The stock already carries an attractive yield of 4%, but with a payout ratio of just over 50% forecast for 2017, there’s plenty of room for future growth as well. With an above-average dividend yield and solid long-term dividend growth potential, Pets At Home seems to me like a dividend growth machine that income investors should take a good look at.
http://www.fool.co.uk/investing/2017/03/16/2-beaten-down-shares-with-dividend-growth-potential-2/
Sign In
Follow the stocks
