An AIM stock I’d buy on the dips and hold for 10 years

This family-run AIM stock is a quality business that’s starting to look very affordable for my portfolio, says Roland Head.

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The AIM index was created to provide an easier route to market for smaller, growth businesses. While some AIM stocks fit that description, it has also become home to some well-established businesses that don’t need the extra hassle and cost of a Main Market listing.

In my opinion, one of the best companies on AIM is flooring specialist James Halstead (LSE: JHD). Today I want to explain why this family-run firm is now on my list of shares to buy.

The business

The firm produces and supplies a wide range of floorcoverings. The company was founded by James Halstead in 1915 as a textile producer, but entered the flooring market in the 1930s. Halstead’s big breakthrough came in the 1940s when it developed a new type of vinyl flooring, Polyflor.

Today, it has a market cap of nearly £900m. Polyflor remains at the core of Halstead’s business, but the group now offers a much wider range of flooring products and operates through much of Europe, the Middle East, Asia and Australia. Customers include hotels, office blocks, hospitals and airports.

Chief executive Mark Halstead is the latest family member to run the business. The Halstead family still have a sizeable shareholding too.

In my experience, family ownership is generally a good thing for a stock market investment, as it encourages a long-term approach. In many cases, including James Halstead, family stocks also have a strong track record of dividend growth.

Why I’d buy now

James Halstead is on track to report record profits this year for the year ending 30 June 2022. Broker forecasts suggest sales of £276m and a pre-tax profit of £52m, up from £266m and £51m last year.

Despite this positive momentum, the share price has fallen by more than 30% since the start of the year.

My guess is that the market is pricing in the risk of a recession and slowing in demand. Rising costs are also a worry. In the short term, I share these concerns. But on a longer-view, I think James Halstead is starting to look quite attractively priced.

This is a very profitable business, with a typical operating margin of about 19%. Cash generation is good, and the company has reported a year-end net cash balance for more than 20 years.

Another attraction for me is that James Halstead’s dividend has not been cut for at least 30 years. This year’s forecast payout of 7.7p per share gives a yield of 3.8% and looks very safe to me. It should be covered by both earnings and surplus cash, so I can’t see any reason for a cut.

At current levels, my sums suggest James Halstead shares are reasonably priced. The main risk I can see is that its long run of growth may be derailed by events outside its control or even by botched management decisions. That could trigger a longer share price slump.

Personally, I’m willing to accept this risk. I think James Halstead’s long-term record of steady growth and reliable dividends is likely to make the business a good investment. This AIM stock is on my short list of possible buys for July.

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 considered so you should consider taking independent financial advice.

Roland Head has no position in any of the shares 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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