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

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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.

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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.

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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.

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