Halma owners can expect the same peace of mind as those who buy its safety products…
If asked to guess which company this morning extended to 30 years its glorious run of 5% a year or more dividend growth, you might plump for a utility, an oil major or -- if you've been marooned on a desert island -- a bank.
Engineering is the last place you'd look. But Halma (LSE: HLMA) is no ordinary metal basher.
Its health and safety markets have intrinsically defensive qualities. Even in tough times, nobody wants to be the guy who let the office burn down because they skimped on smoke detectors -- and Halma is the world's second-largest manufacturer. Many of its other products, from security sensors to elevator equipment, occupy similar niches.
The safety first motto extends to the boardroom, too. Management stresses modest and sustainable growth through innovation (Halma spends 5% a year on R&D) and strategic acquisitions, rather than going flat out for growth.
Old-fashioned conglomerates got a bad name, but there's a common thread between Halma's dozens of subsidiaries, which are organised into three divisions -- Infrastructure Sensors, Health and Analysis, and Industrial Safety. Subsidiaries are overseen by group management, but given considerable autonomy to respond to their own markets.
I'd argue this structure is defensive, too. Big companies can fall victim to grand one-size-fits-all plans. Halma's corporate structure is more like one of its products, with built-in fail-safes. If a particular subsidiary loses the plot, the overall impact is limited.
This diversity also smoothes the ups and downs of various sector cycles. For example, UK water companies are currently holding off on capital investment, which has hurt sales of Halma's leak detection equipment. Yet profits have risen 14% in its Industrial Safety division.
Results aided by the weak pound
No engineer can be entirely immune to the global slowdown and Halma has found some markets tough, but today's results met expectations.
Profit before tax and amortisation was £79.1 million in the year to 28 March, up from £72.8 million in 2008. Favourable exchange rates helped -- at constant currency, organic profit declined 3.3%.
Similarly, full-year revenue was up 15.4% to £455.9 million, with underlying organic revenue growth of 10.7% -- but strip out the currency affect and organic growth was just 2.5%.
Return on total invested capital -- a key measure for Halma's management -- fell slightly to 13.1%.
With statutory profit before tax up 7% to £72.8 million, the increased dividend of just under 8p per share is covered some 1.9 times.
The pound has strengthened recently, which will see these currency gains unwind if it persists. Against that, Halma's net debt of £51 million would fall, since it's mostly held in foreign currencies. Debt is anyway modest compared to the £659 million market cap -- another safety feature.
Sensing growth markets
Halma's results aren't spectacular -- especially given the currency windfall -- but they compare very well to firms who've slashed dividends or undertaken rights issues due to the credit crunch and recession. In comparison, the downturn has simply spurred Halma's management to look for £15 million of cost savings over the next year.
Halma will emerge from the slump in good shape, then, but how will such a cautious company fare in the boom times? I see two areas that offer extra potential for growth:
Overseas markets: Revenues from outside of Europe and the US grew by 31% last year, to 22% of the total. Revenue from China alone was £12 million -- it's doubled in three years. Halma subsidiaries are moving production to a new Shanghai factory, and there's a new hub in Mumbai, India, too. The combination of growing emerging markets and falling costs from such manufacturing could provide a nice boost to profits.
Green technology: The health and safety trend has been rolling across the world for years, but green concerns are lagging. Here Halma's environmental products could come into their own -- it's especially strong in water analysis and treatment.
What price safety?
At 172p, Halma shares are on a trailing P/E of 11 and a historic dividend yield of 4.5%.
That's not exactly cheap in today's market. On the other hand, few companies have such a steady record. Only a couple of analysts expect Halma's earnings to decline despite the ongoing global weakness, and then only modestly.
The secure and growing dividend makes Halma a must for any UK income portfolio in my view, which was why I bought it a few years ago. The yield then was around 3.5%, so I think at today's price it is even more attractive.
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Note: Owain owns shares in Halma.
