Forget Cash ISAs! I’d invest in this company for its growing dividend

This company’s valuation looks reasonable to me, and I reckon it has the potential to grow its dividend in the years ahead.

 

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I wouldn’t entertain putting money into a Cash ISA because they pay pitifully low rates of interest. Instead, I’d buy the shares of companies such as education specialist RM (LSE: RM) and pocket the stream of growing dividends.

I like the firm’s consistent record of dividend-raising delivered over the past few years. Since 2013, the shareholder payment has risen by more than 112%. And the share price is around 145% higher than it was six years ago too. Shareholders over the period have done well.

Fast-growing international sales

The story behind RM is one of weaker UK sales lately and a fast-growing international operation. Around 17% of overall revenue came from abroad during 2019. The company is engaged in a programme designed to adapt operations to the evolving requirements of the education sector. And at the beginning of 2019, the directors set out four strategic themes, which they believe will help focus the firm and enable the creation of long-term value for shareholders.  

The themes are Intellectual Property & Technology Development, International Growth, Innovation, and Efficiency & Simplicity. I reckon that’s a good list and could help the business grow from where it is today.

Today’s full-year report for the period to 30 November kicks off with the headline: “Steady progress and continued international momentum.”  Overall revenue rose just 1% compared to the year before but, within that figure, revenue from abroad increased by 18%, suggesting decent progress with at least one leg of the list of themes.

Adjusted diluted earnings per share moved 2% higher and the directors pushed up the total dividend for the year by 5%, continuing several years of annual rises in the payment. Chief executive David Brooks said in the report the year has been “solid” with revenue and operating profit being underpinned by a “stronger” performance from the firm’s two technology divisions. However, the third division, Resources, had a “challenging” year.   

Acquisitive growth

During the period, RM acquired Australian company SoNET, which provides Software as a Service platforms mainly to the education and government sectors.  The directors reckon SoNET’s e-testing software “augments” RM’s existing exam e-marking capability. Now the firm can offer end-to-end digital assessment services.  Acquiring SoNET’s technology means RM can explore new market opportunities and “accelerate” the growth of the Results division.

Looking ahead, Brooks reckons RM is “well placed” in the year ahead to address the market opportunities “across each of its divisions.City analysts following the firm expect earnings to increase by a low single-digit percentage in the current trading year to November. And they’ve pencilled in another 5% increase in the dividend.

Meanwhile, with the share price near 280p, the forward-looking earnings multiple for the current year is sitting close to 10.5 and the anticipated dividend yield is about 3%. Those earnings should cover the payment more than three times.

The valuation looks reasonable to me, and I reckon the company has the potential to grow 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.

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