2 high-quality dividend-hikers I’d buy and hold for the long term

Sometimes it’s just best to pay a little more for a slice of a great company. Paul Summers picks out two favourites.

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Many investors love the thrill of buying unloved or secret stocks in the hope that their true value is realised by others later down the line. 

That said, there’s also something about paying more (but not too much) for quality companies that don’t require constant monitoring and just letting them get on with things. 

I’d put Vimto-maker Nichols (LSE: NICL) firmly in the latter category, alongside industry peers AG Barr and Britvic. Don’t get me started on Fevertree

Reassuringly expensive

Today’s results for 2018 from the mid-cap were further evidence of just how reliable the company is. Revenue was up 7% to £142m and pre-tax profit, before exceptional items, rose 4% to £31.8m.

Commenting on results, non-executive chairman John Nichols said the company’s performance in the UK — where total sales increased 12.7% to £114.6m  had been “driven by the strength of the Vimto brand” which was “continuing to outperform the wider soft drinks market.” Helping to justify recent investment in this part of the company, sales from Nichol’s Out of Home channel also increased by 15.2%.

Performance overseas was more mixed with progress in Africa offset by weaker sales in the Middle East, as a result of the ongoing conflict in Yemen and issues over shipments to Saudi Arabia. All told, international sales were almost 12% lower (£27.4m) than in 2017. A temporary blip, I think.

Looking ahead, there’s little to make me think that Nichols will encounter any serious difficulties in the rest of 2019 (although the aforementioned conflict will need to be monitored). It’s debt free, has loads of cash, a portfolio of excellent brands, generates high margins and returns on capital and, considering our forthcoming exit from the EU, isn’t completely reliant on the UK market for its success. 

Aside from the above, there’s also the fact that Nichols consistently hikes its cash returns to shareholders. Today’s 14.5% increase to the final dividend (26.8p) brings the total for the last financial year to 38.1p — up 13.7% and representing a trailing yield of 2.4% based on the share price at the time of writing. That may look average but, as mentioned here, regular hikes to small dividends are often better than large but stagnant returns. 

Changing hands for 21 times forecast 2019 earnings before this morning, Nichols is one of those companies that very rarely goes on sale. Those who already hold should continue doing so, in my opinion.

Dividend hiker

Another share that could be worth paying up for is gas mask supplier and milking point solutions provider Avon Rubber (LSE: AVON).

The small-cap’s shares possess many of the attributes boasted by Nichols, including a bulletproof balance sheet (no debt and £46.5m in cash at the end of the last financial year), high returns on capital, and regular double-digit hikes to the annual dividend.

The firm recently reported that its Protection arm had “enjoyed a solid start to the year” after securing a new contract from the US Department of Defense. The first order relating to this — 7,000 mask systems worth $17.8m — has now arrived. As a result (and despite “tougher dairy market conditions” impacting on its milkrite/InterPuls business), Avon’s management remains confident of achieving its expectations for the full year.

At almost 17 times forecast earnings, this stock isn’t screamingly cheap, but is still very reasonable considering the company’s solid track record.  

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Nichols. 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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