Why I’m tempted to invest in this dividend growth stock for retirement

I reckon this rising dividend is worth collecting while we wait for a valuation re-rating upwards.

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I can’t fault technology company Cohort (LSE: CHRT) on its dividend record, which is one of the first things I look at when evaluating stocks for my long-term retirement portfolio.

The firm operates in the defence sector and markets related to that, an area in which trading conditions have been tough for some time. Yet Cohort has been holding its own and delivered some impressive dividend increases over the past few years:

Year to April

2014

2015

2016

2017

2018

Adjusted earnings per share

19.15p

20.45p

27.18p

27.93p

30p

Dividend per share

4.2p

5p

6p

7.1p

8.2p

The dividend has grown more than 95% over four years, which is impressive, and I think there’s much more to come. Cohort’s strategy is based on the core belief that small and medium-sized enterprises (SMEs) can prosper when they are in a larger group. The firm owns four innovative, agile and responsive” businesses (EID, MASS, MCL and SEA), which each have “high growth potential.”

A difficult trading environment

However, in today’s full-year results report, Cohort said that although the international and domestic security environment calls for greater resources to be devoted to defence and counter-terrorism in the UK and other countries, “strong” pressures on public expenditure in the UK and “in many other markets” are keeping demand for the firm’s services suppressed.

But today’s figures don’t look too bad. Revenue was broadly flat for the year compared to last year and adjusted earnings per share moved up just over 7%. The closing order book moved down 25% to £102.5m, but chairman Nick Prest said that it “provides a reasonable underpinning for the current year” when considered alongside contract wins since the end of the trading year and the firm’s pipeline of prospects. Lower order intake arose during the year because of “delays rather than losses or a lack of opportunities.”

Confidence in the outlook

Looking ahead, the directors said that there is a larger-than-normal “concentration of opportunities” for the current year and they expressed their confidence in the outlook by pushing up the total dividend by 15%, which I reckon is a figure worth noting.

City analysts following the firm expect earnings to increase 2% in the current year and 1% next time. Meanwhile, at today’s share price close to 357p, the forward price-to-earnings (P/E) ratio for 12 months to April 2020 sits just under 12 and the forward dividend yield is a little higher than 2.7%. Those forward earnings should cover the payment a healthy-looking three times or so.

It would be hard to make a case for the firm being overvalued and I think if trading conditions improve in the future and forward earnings estimates crank up, we could see an upwards valuation re-rating materialise. Meanwhile, with the firm’s operations ticking over in the current trading environment, I reckon it’s worth collecting that rising dividend while we wait.

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 recommended Cohort. 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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