A focus on leading market positions pays off for this aviation engineer.
By focusing on markets where it has a leading position and strong technical differentiation, Cobham (LSE: COB) has produced strong set of full-year results, the star feature of which is a 33% hike to rebase the dividend at 8p per share.
At the recent share price of 210p, the aerospace, avionics and flight operations specialist is on a trailing dividend yield of 3.8%, twice covered by earnings and more than four times covered by free cash flow. It also means the dividend has risen 113% over a five-year period.
Support from cash
Cash flow has been a strong feature of Cobham's operation for some time. In these results, there's a 24% lift in net operational cash flow to £393m, enabling a 29% decrease in net debt to £233m, which throws up a net gearing figure of 23% -- modest by most standards.
A respectable 17% return on capital-employed parallels the strong performance on cash.
A rising order book
With 56% of revenue coming from the US, 23% from Europe and the rest from around the globe, Cobham has shrugged off concerns about tight government budgets and enjoyed a steady stream of contract wins throughout the year. The overall order book is up 7% at £2.5bn.
The directors see a stable outlook in the important US defence and security market, and good growth prospects elsewhere.
There has been a strong focus on costs throughout the business with rationalisation of operations and divestment of non-core and underperforming businesses. On the flip side, Cobham has a pipeline of targeted acquisition candidates to help it build on the leading and more profitable market positions that it is aiming for. Indeed, these results show a 1.4% uplift in what it calls underlying trading margin to around 20%.
Building value
I last wrote about Cobham in April last year, saying: "Investors with a five-year timescale in mind could see their dividend payments increase over that period and, if that happens, returns might be augmented by a share price that moves up to compensate."
Well, so far, the dividend has moved very strongly up but the share price is down from the 227p it was then.
Cobham has been a robust dividend grower for some time. Right now, investors have the opportunity to lock in that income stream for a trailing underlying earnings multiple of around 9.5. Meanwhile, the directors' move to rebase the dividend upwards seems to demonstrate their confidence in the company's future.
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