It's a flooring firm with a phenomenal dividend record.
For readers who missed the introductory article of this series, I'm helping my teenage son, Sim, build a portfolio of family firms and teaching him the basics of investing in the process.
Using The Motley Fool ShareBuilder service, we're investing £150 in a different firm each month, looking to choose companies that offer reasonable value at the time of purchase.
Searching for value
Last month Sim learnt about how a crisis in a sector of the market can often provide investors with a good buying opportunity. He made his first investment -- in out-of-favour oil services company Hunting (LSE: HTG).
This month, he's been learning about dividends as another way of finding value. And how reinvesting them -- which is what he'll be doing via the ShareBuilder's automatic reinvestment facility -- is a great way to build long-term wealth. As Benjamin Franklin put it: "Money makes money. And the money that money makes, makes more money."
As far as family firms, in particular, are concerned, many were able to carry on increasing their dividend payouts right through the recent recession because of the prudent way they run their businesses. Some even rewarded loyal shareholders with additional 'special dividends'.
Sim set about finding a company with a good dividend record, and a decent current yield to give the future compounding effect of dividend reinvestment a turbo-charged start.
From watchlist to shortlist
We have an extensive watchlist of family firms. Sim narrowed it down to companies that had not only increased their dividends annually over the last five years, but also paid out special dividends during the period.
He came up with a shortlist of three candidates: engineer Goodwin (LSE: GDWN), flooring firm James Halstead (LSE: JHD), and lighting company FW Thorpe (LSE: TFW).
He had made good use of the dividend 'tutorial' Dad had given him on researching historical and forecast dividends, and calculating yield and dividend cover, compiling the following table:
| Company | Share
price | Market
cap | Historic
yield | Historic
cover | Forecast
yield | Forecast
cover | Special
dividends
(year) |
|---|
| Goodwin | 1,153p | £83m | 2.4% | 4.4x | none | none | '09 |
| Halstead | 635p | £329m | 3.9% | 2.0x | 4.3% | 1.8x | '05, '06, '07, '09 |
| Thorpe | 600p | £70m | 2.7% | 4.4x | none | none | '06, '09 |
James Halstead stood out, with its yield comfortably above the FTSE All-Share's yield of 3.2%. Dividend cover was lower than Goodwin's and Thorpe's, but a dividend covered twice by earnings (1.8x by forecast earnings) is perfectly healthy.
We decided that Halstead's attractive yield and adequate cover, together with its size and record of paying additional special dividends, made it the top choice for further investigation.
James Halstead -- family firm
Founded in 1915 as a weaving business in Manchester, Halstead today is a leading manufacturer of resilient flooring products. It generates nearly 60% of its revenue from outside the UK and supplies a wide range of sectors. You'll find Halstead's flooring in schools and hospitals, airports and cruise ships, offices and conference centres; even in the Scott Base in Antarctica!
Current chairman Geoffrey Halstead is the grandson of the founder and has been with the company since 1947. Chief executive Mark Halstead, who has over 20 years' experience with the company, represents the fourth generation of the family. Collectively, the family owns over a third of the company's shares.
The nitty gritty
Halstead's long history of revenue and profit growth -- largely organic -- has supported a phenomenal dividend record. The latest interim was up 10%, putting the company on target for a 35th consecutive year of dividend increases.
The company has paid out over 150p per share in regular dividends since 2005, and a further 100p per share by way of a capital return and three special dividends.
I see no reason to think that the company won't increase its regular dividend over the next five years, although it would be asking a lot for it to deliver the same level of 'specials'.
However, it does have £41m in cash on the balance sheet -- a still-substantial £25m if we factor in a pension deficit -- and it perhaps wouldn't be a surprise if the company celebrated the centenary of its founding with a special dividend in 2015. The pension deficit isn't ideal, of course, but it looks eminently manageable.
The immediate future
In a pre-close trading update in July, ahead of full-year results scheduled for release in late September, Halstead said that it "expects to achieve market expectations for another record year for profits."
There was plenty of positive news to offset higher raw materials costs and the delay or deferral of some UK infrastructure spending plans. The company added that it had started its new financial year "confidently".
A solid buy
We decided that Halstead's history of growth and clear commitment to shareholders made it a great buy-and-reinvest-dividends candidate -- and that a forecast first-year dividend yield of over 4% represented very decent value.
Halstead is one of the bigger AIM-listed companies, but had a fairly wide spread (620p-650p) around the 635p mid-price. Sim's buy went through at 649p.
A portfolio of two
It's not much of a portfolio yet! But Sim's happy with his first two investments, which, at the time of writing, look like this:
| Company | No. of
shares | Avg cost
per share | Current
price | Book
cost | Current
valuation | Profit/
loss |
|---|
| Hunting | 32.4 | 462.6p | 518.5p | £150 | £168 | +12% |
| Halstead | 22.8 | 658.8p | 626.5p | £150 | £143 | -5% |
| Total | | | | | £311 | +4% |
* The average cost per share figure includes all associated dealing costs
Look out for the report on Sim's third buy this time next month.
More in this series:
> G A Chester & Son own shares in Hunting and James Halstead.
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