Why I’d pile into this FTSE 250 high-yielding growth stock right now

Dividend growth looks set to continue with this FTSE 250 (INDEXFTSE: MCX) stock.

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One of the things I like most about FTSE 250 firm Meggitt (LSE: MGGT) is its steady record of dividend-raising. Since 2013, the company has increased its dividend by around 24% over four trading years, which is good going. Looking forward, City analysts following the firm expect dividend increases to continue, rising around 5% this year and more than 6% in 2019.

A strong niche player

I think the firm’s operating sector helps it outperform with dividends. Meggitt is an engineering company specialising in high performance components and sub-systems for the aerospace, defence and energy markets serving customers worldwide. The firm is headquartered in the UK and can trace its history back around 160 years during which time it has kept one step ahead of market changes by focusing on what it calls “engineering innovation.” Today, the firm has operating facilities in Asia, Europe and the Americas.

The company has come a long way from its beginnings making aviation instruments for hot air balloons, including the world’s first altimeter. These days the product range is vast, including stuff for aircraft such as wheels, brakes, fire protection systems, sensors and controls and sensors for the military and oil & gas sectors. The firm says most of its products have a common requirement of smart engineering for extreme environments, which needs to deliver “mission- and safety-critical components and sub-systems” capable of performing to exacting requirements.

I reckon the firm’s expertise in its market niche acts as something of an economic moat. There’s a strong aftermarket too, which keeps the incoming cash flowing into the company’s coffers. The firm’s products are often subjected to harsh operating environments, which results in high levels of wear and tear and strong demand for spares and repairs, which all bodes well for the ongoing security of the dividend.

Focusing on attractive markets

Today’s interim results report revealed that orders are up around 12% compared to a year ago. Some 24% of that growth is described as ‘organic’, which excludes the effects of acquisitions, disposals and foreign exchange and therefore suggests the company’s products and services are going down well with customers. Although revenue slipped by 1%, organic growth in revenue came in at 9%, reassuring me that there is a strong business here. Underlying earnings per share eased by 2% but free cash flow increased by 19% and net borrowing fell by 7%. On balance, I reckon the financial indicators that really matter are moving in the right direction. The directors seem to agree because they underlined their confidence in the outlook by once again raising the interim dividend, this time by 5%.

During the period the firm completed three more divestments as part of an ongoing strategy to focus on attractive markets. Some 70% of revenue now comes from operations where Meggitt enjoys “a strong competitive position.” Chief executive Tony Wood said in the report that “trading in the first half was strong, with organic growth accelerating across our civil aftermarket, military and energy end markets.” He reckons revenue will grow between 4% and 6% over the whole of 2018. Meanwhile, today’s share price around 568p throws up a forward dividend yield over 3%, which I reckon is well worth looking into.

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 Meggitt. 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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