Quality testing and certification powerhouse Intertek (LSE: ITRK) has delivered a share price gain of 18% so far this year – more than double the 7% delivered by the FTSE 100 index.
The firm’s latest results suggest to me that this business is regaining momentum after a difficult period in the pandemic.
Revenue rose by 6.6% during the first half of the year on a constant currency basis. An increase in operating margin to 15.9% meant this sales growth translated into a 16.2% increase in pre-tax profit, which rose to £242.6m.
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CEO André Lacroix is confident of a strong finish to the year and says the business remains on track to meet its medium-term target of a 17.5% profit margin.
Why I like it
Intertek operates behind the scenes, providing a huge range of testing and certification services to business clients in sectors such as energy, consumer goods, chemicals and food.
For example, the company is the world’s leading provider of battery safety testing services. Battery producers pay Intertek to certify their batteries to numerous standards required for them to be sold.
Intertek’s services are essential for many of its customers. So any increase in global economic activity’s likely to generate an upturn in demand.
Of course, this business does face some competition. But Intertek has a history that goes back more than 130 years. It currently operates in more than 1,000 locations in 100 countries, and its certifications are accepted globally.
Replicating these advantages is difficult for competitors, especially as Intertek continues to expand by acquiring smaller specialist firms and incorporating them into its global system.
A 43% dividend increase!
These advantages help to give Intertek strong pricing power and those high profit margins I mentioned earlier.
Since its flotation in 2002, I estimate Intertek shares have delivered an average total return (share price gains plus dividends) of 12.7% a year. That’s well ahead of the UK stock market average of about 8%.
The dividend has never been cut and management recently decided that the business could afford to be a bit more generous with shareholder payouts.
This week’s interim results included details of a hefty 43% increase to the interim dividend, which rises to 53.9p per share.
Broker forecasts suggest the full-year dividend will rise by 30% to 146p this year, with a further 10% increase to 161p predicted for 2025. These forecasts give the shares a 2024 yield of 3%, rising to 3.3% in 2025.
These payouts still look affordable to me, so I reckon this is good news.
What I’m doing
The main risks I can see are that some of Intertek’s main markets could suffer a slowdown. Inevitably, that would have some knock-on effects on demand for the company’s services.
Intertek shares aren’t dead cheap either. They currently trade on a 2024 forecast price-to-earnings ratio of 21.
I don’t think there’s much room for disappointment in the current share price. But the firm’s latest update’s left me confident it’s performing well.
I already have a mid-sized position in Intertek in my portfolio. I don’t have any spare cash to add to this holding at the moment, but I remain very positive and would be happy to buy more at current levels.
