The share price of power solutions provider Aggreko (LSE: AGK) slumped by 10% today after it released a trading update. Investors appear to be rather concerned about growth prospects in emerging markets, alongside mixed performances in other parts of its business during the third quarter.
However, with a positive outlook and a reiteration of its guidance for the full year, the company could offer sound dividend growth potential. With inflation forecast to rise, it could prove to be a bargain buy for the long term.
Mixed performance
While the company remains on track to meet forecasts for 2017, its performance was somewhat volatile. For example, its Power Solutions Utility revenue fell 15% versus the same period a year ago. This was driven by repricing and off-hires in Argentina. Furthermore, there have been delays in the receipt of payments from a range of customers within the division. This is particularly the case in Africa where liquidity remains a problem. This may be a further factor as to why the company’s share price fell heavily today.
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Despite the challenges in its Power Solutions Utility division, Aggreko’s Power Solutions Industrial revenue moved 6% higher. It experienced strong performance in Eurasia, while Africa continues to provide a catalyst for top-line growth. Similarly, Rental Solutions revenue was up 9% on last year. This helped the company as a whole to generate sales growth of 8% on a reported basis.
Dividend potential
Following its share price fall, the stock now has a dividend yield of 3.1%. This is ahead of inflation and suggests that it may be able to offer a real terms income return over the medium term. Dividend growth could prove to be high since Aggreko has a dividend coverage ratio of 2.1. This suggests that shareholder payouts could grow at a faster pace than profit without causing the company any financial challenges. And with earnings forecast to move 12% higher next year, the outlook for income investors appears to be positive.
Of course, other FTSE 350 stocks also offer inflation-beating dividend potential. Utility stock SSE (LSE: SSE) has a dividend yield of 7% at the present time. Part of the reason for its high yield is the regulatory risks it faces in the form of price caps. They have caused investor sentiment to deteriorate even though the company is expected to match RPI inflation when it comes to dividend growth in future years.
Unlike Aggreko, SSE offers a relatively stable business model. This means that the chances of dividend growth and dividend payment are high, which may provide greater certainty to income investors. As well as this, its shares have a price-to-earnings (P/E) ratio of just 11, which is lower than Aggreko’s P/E of 14. Both stocks, though, appear to offer wide margins of safety given their outlooks and could be worth buying for the long term.
