Why I’d invest £1,000 in this dividend-growing company right now

I’m attracted to this firm’s positive outlook, growing dividend and reasonable valuation.

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What I like most about textile rental services company Johnson Service Group (LSE: JSG) is its impressive record of steady annual growth in revenue, normalised earnings per share, operating cash flow and the dividend.

A strong record of trading

Those financial indicators have been increasing by decent percentages annually for several years, and the robust cover for the dividend payment from normalised earnings suggests that growth is set to continue. Indeed, City analysts expect earnings to cover the dividend more than three times in 2019. A growing dividend with strong cover like that is attractive to me because it suggests the business is robust. The rising dividend is tangible proof of Johnson Service’s ability to grow, expressed in cold, hard cash. We can’t argue with that.

The firm operates in the UK offering premium” linen services for the hotel, catering and hospitality markets, and “high-volume” hotel linen services with its brands such as Stalbridge, London LinenBourne, Afonwen and PLS. There’s a high degree of repeat business, which I think gives the firm a defensive element to its operations. The company reckons its ability to clean, maintain and care for textiles means its services are “fundamental” to the everyday operations of its clients.  The firm also supplies workwear and protective wear through its Apparelmaster brand. 

Growth has been both organic and via a sustained programme of acquisitions, which has led to the firm acting as something of a consolidator in what was previously a fragmented market. Today’s pre-close trading update had a positive tone and covered the six months to the end of December. During the period, the company completed a £3.3m investment in its Stalbridge Linen unit and also acquired a company called South West Laundry, which it integrated into the Stalbridge brand. On top of that, the directors signed a contract with a developer to build a laundry in the North of England, which Johnson Service plans to lease in 2020 as part of our strategy to increase future capacity and revenue generating opportunities within our high-volume linen business.”

A positive outlook

The outlook is positive with the firm likely to have met full-year market expectations, which City analysts have pencilled in as a 7% increase in adjusted earnings for the year. They also expect a 6% advance in earnings during 2019, which suggests the firm’s steady growth is set to continue. Meanwhile, with the share price close to 122p, the forward earnings multiple for 2019 sits at just over 12 and the forward dividend is yielding about 2.6%. But remember, Johnson Service could choose to halve its dividend cover from earnings by increasing the dividend payment, which would push up the yield to around 5.2%. The fact that the company is instead redeploying the cash into the business suggests to me there’s plenty of scope for growth in earnings, cash flows and the dividend from here. I see the shares as attractive.

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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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