Why I’d pounce on this evolving company’s shares today and lock in the 4% yield

A well-formed strategic plan has led to generally rising revenue, normalised earnings and dividends for this cash-generating dividend payer, and I think there’s more to come.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The immediate attraction of smart infrastructure solutions company Costain Group (LSE: COST), for me, is its low-looking price-to-earnings rating around 10 and its high-looking dividend yield close to 4%.

But digging a little deeper, the firm has performed well over the past four years or so with generally rising revenue, normalised earnings and dividends. If you are comfortable with the inevitable cyclicality inherent in the firm’s operations, I think Costain could be a good one to tuck away.

At the heart of UK infrastructure

Operations revolve around infrastructure in the UK’s energy, water and transportation sectors. The company aims to serve “blue-chip” clients “whose major spending plans are underpinned by strategic national needs, regulatory commitments or essential maintenance requirements.” I think it’s a good idea that the firm has a decent grasp of where the money will come from to pay for its services and why. The knowledge should help to keep operations focused and away from the temptation to stray into non-core contracts that could dissipate management energy.

The firm explains in today’s full-year results report that it aims to execute its strategy by offering a range of “innovative” services across the whole lifecycle of its clients’ assets by “integrating complex delivery, consultancy, technology and asset optimisation services.”  So, we’ll find Costain engineers, technicians, craftspeople and labourers working on the railways, highways, power infrastructure, oil & gas installations, water plants and nuclear power stations up and down the country. And they’ll be backed up with office-based engineers, draughtsmen (and women etc.), and contract management professionals.

Today’s figures look encouraging. Although revenue eased back by almost 14%, underlying operating profit rose nearly 7% and basic earnings per share shot up just over 16%. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 8.2%. Indeed, the order book ended 2018 almost 8% higher than the previous year and the directors describe the anticipated work as “higher quality” due to the firm’s “differentiated strategic positioning.” Some 90% of the orders fall into the category of repeat businesssuggesting the potential for reliable incoming cash flow ahead.

An impressive evolution

It seems to me that Costain has evolved a long way from being merely an engineering and construction company, which should be some comfort to investors wary of the sector after recent high-profile failures such as Carillion. I think the company’s integrated and involved approach to working with its customer-companies should keep the business ticking over, growing gently, and out of the bankruptcy court.

We have learned today that Alex Vaughan, the current managing director of the firm’s natural resources division, will be promoted to chief executive in May. I see that as another positive because a change at the top in any business can bring new resolve and vigour to the enterprise. I view the shares as attractive.

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 share 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.

More on Investing Articles

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

As BAE Systems’ share price heads towards £14, is there any value left in it?

BAE Systems’ share price has soared since Russia invaded Ukraine, but it still looks very undervalued and has great growth…

Read more »

Bronze bull and bear figurines
Investing Articles

Which is the better bank buy right now: Lloyds shares or HSBC?

HSBC pays a much higher yield than Lloyds shares, has much more value left in its share price, and doesn't…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

At 231p, is there value in the Legal & General share price? Here’s what the charts say!

Here, this Fool delves deeper into Legal & General to see if its current share price is the bargain it…

Read more »

Investing Articles

3 diverse FTSE stocks I’d consider buying to invest in Asia

This trio of FTSE shares could be the perfect way to invest in the fast-growing economies of Asia over the…

Read more »

many happy international football fans watching tv
Investing Articles

6.4% yield! Is ITV a dividend stock to consider buying during the Euros?

Our writer takes a look at ITV and assesses whether the FTSE 250 dividend stock might be a good fit…

Read more »

Illustration of flames over a black background
Investing Articles

Up 915% in a decade! This growth monster may also be the best FTSE income stock of the lot

Harvey Jones has been watching this top FTSE 100 growth and income stock for months and now he's found another…

Read more »

Investing Articles

The tax-free route to millionaire portfolios

• Although annual ISA subscriptions are capped, ISAs are an undoubtedly serious wealth-building tool: you can build serious wealth.

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Will FTSE 100 shares soar 35% after the general election?

Royston Wild explains why FTSE 100 shares might be about to soar, and discusses a top penny stock that could…

Read more »