I’m searching for the best dividend stocks to buy in the current uncertain landscape. And FTSE 250 retailer Pets at Home (LSE:PETS) sits somewhere near the top of my shopping list.
Not only does the company offer market-beating dividend yields for the current financial year. The defensive nature of the petcare market means it should have the strength to deliver the shareholder payouts that City brokers are expecting.
I also think it’s in great shape to deliver impressive earnings and dividend growth over the long term. Here’s why I plan to add it to my Stocks and Shares ISA.
Impressive sales growth
The amount we spend to feed, pamper and entertain our pets remains largely unaffected by broader pressures on consumer spending. This was evident during Pets at Home’s fiscal first half when consumer revenues rose 8.6%, to £1bn.
Sales growth for the 28 weeks to 12 October comfortably beat the firm’s medium-term target of 7%. And it is an encouraging omen, given the murky outlook for the UK economy heading into 2024.
Pets at Home is a one-stop shop for everything a pet owner needs, and it has built a loyal customer base that keeps its tills ringing.
To illustrate this, the number of subscribers to its VIP rewards programme grew another 3% in the first half, to 7.8m. The programme is an important source of recurring revenues for the business, and gives it additional scope to grow earnings in tough times.
I’m also impressed by the rapid pace at which Pets at Home’s higher margin veterinary division is growing turnover. Sales here leapt 19% on a statutory basis during the first half, thanks to growing customer numbers and a higher volume of client visits.
The company also grew its surgery portfolio by 10,000 sq ft in the period through property extensions and new openings. Steady expansion here gives me extra reason to be optimistic about group earnings.
Dividend growth
City analysts think earnings will dip 9% during this fiscal year (to March 2024). However, this reflects turbulence related to the opening of a new distribution centre, and costs associated with a brand relaunch and creation of a new digital platform, rather than problems with the underlying business.
As for dividends, the retailer is expected to raise the total dividend to 12.9p per share for the current financial year. This results in a healthy 4.4% dividend yield.
By comparison, the average forward yield for FTSE 250 shares sits back at 3.6%.
Dividend coverage isn’t as strong as I’d like. This sits at 1.6 times, below the minimum safety benchmark of 2 times. But a strong balance sheet means the company should be in good shape to meet this year’s predicted dividend. It held net cash of £12.1m as of October.
Animal magic
Pets at Home faces massive competition from other petcare specialists, supermarkets and generic online retailers (like US giant Amazon).
Yet, on balance, I still believe the company is a brilliant buy. With pet ownership in Britain steadily increasing, I expect profits and dividends at the retailer to follow suit.
