Is this dividend stock the FTSE 100’s best-kept secret?

This FTSE 100 stock has notched up over 50 consecutive dividend increases. Yet the company is still very much under the radar today.

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Key Points

  • This FTSE 100 stock has generated huge returns for investors over the long run
  • The stock has an amazing long-term dividend track record
  • The company expects strong growth in 2022

The FTSE 100 index is home to many well-known companies such as Shell, GSK, and Lloyds Bank. But at the same time, it’s also home to many under-the-radar businesses that most people have probably never heard of.

Here, I am going to discuss one of these lesser-known Footsie stocks. This company has a fantastic track record when it comes to growth and dividends and has generated enormous returns for shareholders over the long run. Could it be the FTSE 100’s best-kept secret?

A FTSE 100 legend

Spirax-Sarco Engineering (LSE: SPX) is a British company that specialises in steam systems, electric thermal systems, and pumps and fluid path equipment. Its solutions, which are used worldwide, enable businesses to manufacture everything from food and beverages to medicines, paper, and car tyres. Established in 1888, it listed on the London Stock Exchange in 1959 and joined the FTSE 100 index in 2018. At present, it has a market-cap of about £9.2bn.

A world-class business

An analysis of Spirax-Sarco Engineering’s financials reveals that it’s a very impressive business.

For starters, the company has an excellent track record when it comes to top-line growth. Over the last five years, revenue has climbed from £757m to £1345m, which represents annualised growth of CAGR 12.2%. There are not many companies in the FTSE 100 growing at that rate. In the group’s recent 2021 results, it said that it was expecting 2022 to be another strong year of growth.

Secondly, it’s a very profitable business. Last year, gross margin came in at 77%, which is excellent. Companies with high gross margins tend to be protected from inflation. Meanwhile, return on capital employed (ROCE) in 2021 was 22%, which is also very good. Businesses that generate a high ROCE consistently tend to deliver big returns for investors over the long run.

Third, SPX is a dividend star. The yield here isn’t high, at around 1.2%. However, the company has increased its payout every single year for the last 54 years (at an average rate of 11%). That’s an outstanding achievement. That makes the company one of the most reliable dividend payers in the FTSE 100.

Investor demand

Now the downside. This FTSE 100 stock is quite expensive, even after a recent pullback. The valuation reflects the fact that SPX is a high-quality business.

This year, analysts expect Spirax-Sarco Engineering to generate earnings per share of £3.51. This means that, at the current share price, the forward-looking P/E ratio is about 36. I don’t see that valuation as outrageous. However, it probably doesn’t leave a margin of safety. If growth was to stall, I’d expect the stock to underperform.

Would I buy this FTSE 100 stock today?

Given the valuation, I won’t be buying SPX for my own portfolio today. Right now, the stock is just a bit too expensive for me.

However, I am certainly going to keep this FTSE 100 dividend star on my watchlist. If the P/E ratio was to come down to around 25, I would certainly be interested in buying the stock.

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.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Lloyds Banking Group. 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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