Why I’d buy and hold shares in this phenomenal dividend grower forever

Dividend and capital growth look set to continue with this tempting stock.

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Who would have thought that such a boring-sounding company as Avon Rubber (LSE: AVON) could turn out to be such a spectacular growth proposition? You only have to look at the dividend record to see the progress the firm has made. Over five years, the payment is up more than 260%, and in today’s interim results report, the directors declared that they are pushing up the half-time dividend another 30%, which I take as a strong message that the long-term outlook remains robust.

Great progress

The firm describes itself as “an innovative technology group specialising in respiratory protection systems and milking point solutions.” I wouldn’t normally think of cow-milking alongside the swashbuckling pursuits of fire-fighting, law enforcement and the military, but that’s where an investment in Avon Rubber takes you.

Today’s results are good. At constant currency rates, revenue rose almost 6% compared to the equivalent period a year ago and adjusted basic earnings per share shot up almost 34%. Chief executive Paul McDonald said that the underlying performance more than offset currency headwinds.” Looking forward, the order book closed the period to 31 March almost 30% higher than the year before suggesting that Avon Rubber has good traction in the market and there’s good visibility for the rest of the trading year.

Most business areas are performing well and Mr McDonald said the firm “made further progress on the longer-term growth opportunities.” One of the main drivers is the company’s vibrant research and development activity, which leads to an “expanding product portfolio.” Such new customer offerings keep the firm at the cutting edge of its niche markets, providing solutions that customers need. The success of the strategy shows in the growth numbers for annual earnings, which have been running in double-digit percentages for the past few years.

More to come?

Looking forward, earnings growth seems set to take a breather with City analysts who follow the firm predicting a rise in normalised earnings close to 6% for the year to September 2018 and an uplift the year after that of just over 1%. However, pre-tax profit figure for those two years should continue the march upwards rising 43% and 4% respectively, and revenue projections suggest steady progress too, so I think the growth story remains intact.

Over eight years the shares are up almost 1,236%, so as well as rapid progress with the dividend, investors have enjoyed spectacular capital gains. It seems clear that buying and holding the stock has been the best strategy and I reckon there’s more to come, making Avon Rubber a good candidate for the buy-and-hold-forever approach.

Today’s share price close to 1,350p puts the forward price-to-earnings rating for the trading year to September 2019 at 18.5 and the forward dividend yield sits at almost 1.5%. However, the payment should be covered just under four times by anticipated earnings. Such generous cover suggests to me that the directors see plenty of further opportunity to grow the business, otherwise they would probably return more of the firm’s cash to investors via the dividend rather than hanging on to it to finance growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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