Why I’d buy shares in this FTSE 250 consistent dividend grower

This FTSE 250 (INDEXFTSE: MCX) firm’s strategy is delivering geographical expansion, soaring orders and a rising dividend.

| 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.

FTSE 250 firm QuinetiQ Group (LSE: QQ) describes itself as a science and engineering company operating primarily in the defence, security and critical infrastructure markets.” 

Straight away, that description alerts me to the possibility there’s a fair bit of cyclicality in the firm’s operations. And indeed, over the past six years, we’ve seen volatile revenue, earnings and cash flow. The operational ups and downs reflect in the tortuous route the share price has taken to deliver shareholders a 45% gain over the period.

Great progress with the dividend

But the dividend has risen consistently. Over six years, we’ve seen a more than 70% increase in the pay-out, which strikes me as impressive. With the share price close to 307p today, the forward-looking dividend yield is around 2.2% for the trading year to March 2020. City analysts also following the firm expect earnings to cover the payment just over 2.7 times, which is a comfortable level of cover.

Meanwhile, the anticipated earnings multiple is flirting with 16 for the current year, which means you won’t find the shares in the bargain bin. But if you account for cash on the balance sheet, the valuation drops to below 14 or so. Given that City analysts don’t expect much growth in earnings next year, QuinetiQ seems to enjoy a full valuation by the stock market and that could be because of some decent-looking quality indicators.

For example, the return-on-capital figure is running near 13% and the operating margin at about 14%. On top of that, the company’s net cash position suggests past trading has been profitable in cash terms.

The company’s vision is to become “the chosen partner around the world for mission-critical solutions.” The current strategy was developed three years ago and in today’s full-year results report, the directors said it’s delivering financial improvements. They reckon the new approach has improved the firm’s ability to win new business and increased the international footprint of operations.

Expanding abroad

The ambition is to generate 50% of revenue from outside the UK. Today’s figures reveal around 30% of revenue came from abroad during the year, primarily from the US, Australia, Europe, the Middle East and others, so there’s some distance to travel before the company realises its geographical revenue goal.

However, things are going well, and the total funded order backlog grew by around 56% during the year to stand close to £3,134m with the rate of order intake increasing by 32% compared to the previous year.

Revenue rose a little above 9% over the trading year with underlying earnings per share lifting a by just over 2%. The directors seem happy enough with that progress and the positive outlook and they pushed up the total dividend by just under 5% to continue with the progressive dividend policy.

I think the dividend growth on offer with QuinetiQ, which is driven by the firm’s strategy, is attractive and I’d be tempted to tuck away some of the shares for the long haul.

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

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »