One FTSE 100 stock I’ve had on my watchlist for ages is Spirax Group (LSE: SPX). It’s a British engineering company that’s an unbelievable dividend growth track record.
Recently, this stock hasn’t performed well – it’s currently down 56% from its highs (set in 2021). Is now the time to add it to my portfolio? Let’s discuss.
Amazing track record
Spirax specialises in technology (steam systems, electric thermal systems, and pumps and fluid path equipment) that enables businesses to manufacture everything from food and beverages to medicines and car tyres.
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And for a long time, the company had a brilliant track record when it comes to generating wealth for investors. Over the 10 years to the end of 2021, for example, its share price rose about 700%.
In recent years however, the stock’s been a bit of a disaster. That’s because growth’s slowed due to weak economic conditions. As a result, its valuation – which had risen to high levels (the P/E ratio was in the mid-30s a few years ago) on the back of the stock’s track record – has fallen significantly.
Valuation reset
At today’s share price, the stock still isn’t particularly cheap. With analysts expecting earnings per share of 312p and 354p this year and next, the P/E ratio here is 25, falling to 23.
But I think the shares are starting to look interesting at those multiples. This is a high-quality business that’s very profitable. Over the last five years, its return on capital has averaged 16.5% (companies that can generate high returns on capital often get much bigger over time).
It also has an exceptional dividend track record as I noted earlier. Believe it or not, it has registered more than 50 consecutive dividend increases which makes it a ‘dividend king’ (the yield’s about 2.2% at present).
As for business performance, it still isn’t great due to weak conditions in some of its markets (and currency setbacks). In the first half of 2024, organic revenue growth was just 1% while adjusted earnings per share were down 12%.
However, looking ahead, CEO Nimesh Patel said he expects stronger growth in the second half of 2024. He also said that the company’s focusing its investments to capitalise on global trends and high growth markets, which should accelerate its long-term organic growth.
So taking a long-term view, there are reasons to be optimistic here.
Should I buy?
Given the low level of growth the company’s generating right now, I won’t be rushing out to buy the stock today.
The weak economic environment continues to be a risk here and with the stock still trading at a relatively high valuation, I’d want to see some evidence that business performance is improving before investing.
I may invest in this legendary FTSE company at some point in the future. For now though, I think there are better stocks to buy for my portfolio.
