You might not have heard of FTSE 250 engineering group Bodycote (LSE: BOY), but that doesn’t mean you should ignore it as an investment.
Bodycote is a leading provider of heat treatment and specialist thermal processing. The company offers services such as case hardening (hardening the surface of a metal object) and annealing (used to reduce hardness and eliminate internal stress). It also produces tools that help with metal joining and the application of specialised coatings designed to prolong the working life of engineering components.
A good investment
This isn’t a glamorous business, but it’s an essential one and, in my opinion, this makes Bodycote an exceptional investment proposition.
You see, customers of companies like this don’t tend to shop around too much. They like to stick with trustworthy suppliers, and that’s just what the company has been since it was founded in April 1953.
Thanks to this customer loyalty, as earnings have risen, the company has been able to increase its dividend every year for more than a decade. It doesn’t look as if this trend is going to come to an end anytime soon.
Based on fiscal 2018 figures, the dividend is covered nearly three times by earnings per share. The dividend yield currently stands at 2.2%, which is below the market average. But considering Bodycote’s dividend track record, I reckon it is worth accepting the lower distribution as a trade-off for dividend safety.
Analysts reckon management will hike the payout by 19% this year, taking the yield to a more attractive 2.7%. So, if you’re looking for an FTSE 250 dividend hero, I highly recommend taking a closer look at this British engineering success story.
Another dividend champion I wouldn’t hesitate to add to my portfolio today is soft drinks group AG Barr (LSE: BAG).
Barr has an excellent dividend track record, having paid out some portion of its profits to investors every year for decades. Recently, the payout has grown at a compound annual growth rate of around 9% since 2010, and it doesn’t look as if this trend is going to change anytime soon.
The company is highly profitable and, at the end of its latest financial period, it reported a net cash balance of around £22m. For fiscal 2019, Barr’s return on capital employed — a measure of profitability for every £1 invested in the business — came in at 19%, putting the business in the top 25 most profitable businesses in London.
Unfortunately, Barr’s success is no secret, and as investors have flocked to the business, its valuation has exploded. The shares are currently changing hands at an eye-watering forward P/E of 28.
Still, even though this is above what I would usually be willing to pay for any business, I think this multiple is acceptable for such a profitable, well-managed enterprise. It currently supports a dividend yield of 1.9%, and the payout is covered twice by earnings per share, leaving plenty of room for further growth in the years ahead.