The largest part of GKN (LSE: GKN)’s business is ‘Driveline’, its automotive engineering operation. Serving a notoriously cyclical customer base, GKN’s prospects are aligned with the car industry’s.
This vulnerability is clear in the company’s five-year record. Although GKN reported net profits of €480m in 2012, the figure back in 2007 was less than half of this. GKN made losses in 2008 and 2009. After being cut substantially in 2008, the dividend was dropped entirely the year after and is yet to return to pre-crisis levels.
A good level of earnings and dividends growth is forecast for this year and next. This gives a 2013 price-to-earnings (P/E) ratio of 11.4, falling to 9.9 times next year’s forecast. A dividend yield of 2.6% is anticipated.
Johnson Matthey (LSE: JMAT) has performed well in the last five years. Earnings per share (EPS) for 2008 was 91.0p. 2013 results, issued at the beginning of last month, showed earnings per share reached 140p. Five years ago, total dividends for the year were 38.3p. The payout declared for 2013 was 57p.
Two years of double-digit earnings growth are forecast for this year and next. At today’s share price, that puts Johnson Matthey on a 2014 P/E of 15.2, with the expected yield reaching 2.6%.
Unlike many other FTSE 100 companies, Johnson Matthey serves industry, not consumers. The company company’s track record is testimony to the strength of its business model. It’s premium rating to the average blue chip appears entirely justified.
British American Tobacco
Cigarette giant British American Tobacco (LSE: BATS) (NYSE: BTI.US) has long been considered to be one of the most reliable companies in the FTSE 100. This status is likely inspired by the company’s profit and dividend record.
In the last five years EPS at BATS has increased at an average rate of 13.6% a year. Dividend growth in that time is even more impressive at 15.3% a year on average. In fact, you have to go back a long way to find a time when BATS reduced its dividend.
This success explains why brokers so readily recommend that clients buy the stock. However, I have grave concerns over the tobacco industry’s long-term future and have bet that BATS shares will fall.
What concerns me about my bet on British American Tobacco is that one of the world’s best investors is on the other side of the trade. Neil Woodford of Invesco has a significant stake in the company. This man has been beating the market for decades. For more information on Mr Woodford’s biggest shareholdings, get the free Motley Fool report “8 Shares Held By Britain’s Super Investor”. This analysis is 100% free and will be delivered to your inbox immediately. Just click here to start reading today.
> David does not own shares in any of the companies mentioned. He has bet that the price of British American Tobacco shares will fall.