Not all shares pay dividends – and those that do sometimes stop. But a select group of companies have raised their payout per share annually for decades. One of these so-called Dividend Aristocrats announced today (13 June) that it is raising its dividend yet again.
The 7% increase means that the FTSE 100 firm has now increased its annual dividend per share by at least 5% for 45 years in a row.
Resilient customer demand and ongoing growth prospects
The company in question is not a household name.
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Halma (LSE: HLMA) sells alarm and safety systems to mostly business customers. That is a large and potentially lucrative market, as when it comes to safety many customers are willing to pay for quality. I also expect demand to be strong over the long term.
The company has grown organically and through acquisition. Last year it made eight acquisitions. It has made another one since and says that it has a “healthy pipeline” of potential deals.
A proven strategy in an area with high demand has been successful for it. Last year saw revenues grow by 10% and statutory earnings per share rise by 15%. Even though the dividend grew 7%, it is covered more than three times over by earnings.
Long-term dividend outlook is promising
Although dividends are never guaranteed, that level of coverage means that the payout could keep rising and still stay covered by earnings even if they are flat.
With Halma’s strong business performance over many years, though, I expect it can keep growing earnings. The board seems to pride itself on the firm’s Dividend Aristocrat status and I imagine it feels motivated to try and maintain it.
Great record of dividend growth, but a low yield
However, from an income perspective, there is a fly in the ointment.
The business performance has pushed up the Halma share price. It is 30% higher than five years ago and has more than quintupled in the past decade.
For shareholders during that period, that has been very lucrative. But if I was to buy Halma shares today, it means I would be buying at a price-to-earnings ratio of 37. That is too high for my liking. The long-term share price growth also means that even after decades of annual dividend increases, the yield is less than 1%.
The price puts me off
Sometimes there is a great business that does not necessarily make for a great investment at its current price. For me, Halma fits that description.
This is a strong business and I expect it to keep growing its shareholder payout. But the share price offers me insufficient margin of error, if business performance disappoints.
Net debt has been growing, reaching £653m last year. Weakness in China saw sales decline there last year and there is a risk that trend could spread elsewhere in Asia, hurting revenues.
At a significantly lower share price I’d jump at the chance to buy this Dividend Aristocrat for my ISA. So, for now, it remains on my watchlist.
