Forget Tesco! I’d invest in this cheaper steady dividend-grower instead

With growth on the agenda, I reckon this stock has decent long-term potential and a handy dividend yielding almost 3.5%.

| 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.

I think the Tesco share price looks elevated and the valuation needs to adjust to the reality that the company’s turnaround is complete. Big annual increases in earnings are likely over, and I’d like to see a bigger dividend yield before investing in Tesco today.

To me, Carr’s (LSE: CARR) is more attractive. The firm operates in the agriculture sector suppling things such as feed blocks and farm machinery. It also runs a chain of rural stores in the UK serving the farming community. In the engineering division, the firm makes bespoke equipment for the nuclear, petrochemical, oil & gas, pharmaceutical, process, and renewable energy industries.

A growing dividend

The financial and trading record looks steady. Earnings have been moving up a bit each year and the dividend has risen around 40% over the past five years. With the share price close to 142p, the forward-looking earnings multiple for the trading year to September 2020 is just over nine and the anticipated dividend yield is a smidgeon below 3.5%. That strikes me as a similar dividend yield to Tesco’s but for a lower valuation. And, on top of that, anticipated earnings should cover the dividend just over three times, which looks robust to me.

In today’s full-year results report, Carr’s reported a flat revenue performance for the period with adjusted earnings per share up 5% compared to the equivalent period the year before. The directors pushed up the total dividend for the year by 5.6%. Chair Chris Holmes said in the report the performance was “moderately ahead” of the directors’ expectations. And that outcome was achieved despite unseasonable weather “significantly” affecting trading in the agriculture division.  

Holmes said the firm made acquisitions “across both divisions” during the year and plans to develop Animax into “a centre of excellence for innovation and product development for the wider Agriculture division.” The business became part of Carr’s in its September 2018.

Meanwhile, in the engineering division, the order book is “strong” and the acquisition of NW Total in June 2019 provides the firm with opportunities in the nuclear defence market.

A positive outlook

Growth appears to be on the agenda, although the company reckons that confidence among UK farmers is being affected by the uncertainty about Brexit. However, the directors are confident about the outlook for the full year. And that’s despite challenging weather conditions and a slower-than-expected start to the new trading year in the engineering division because of “contract phasing.”

City analysts following the firm expect a mid-single-digit percentage advance in both revenue and earnings for the current trading year to September 2020. This investment won’t shoot the lights out with growth, but I reckon Carr’s looks attractive as a long-term dividend investment with the potential to keep growing in the years ahead.

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

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

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

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »