Instrument and controls specialist Spectris (LSE: SXS) has released an upbeat trading update today. It shows that it has recorded a rise in sales of 18% for the four months to the end of October. This puts in on track to meet full year expectations. Does this indicate that now is a good time for income-seeking investors to buy Spectris for the long term?
Spectris’s sales growth was fuelled mostly by the effect of acquisitions and foreign exchange translation. For example, acquisitions contributed 4%, while weaker sterling added another 18% to the company’s reported top line growth figure. As such, Spectris’s like-for-like (LFL) sales declined by 4% versus the same period of last year.
While disappointing, this is in line with expectations. Spectris faces challenging trading conditions, which have deteriorated during the recent period. North America, in particular, has been a region where Spectris’s performance continues to be impacted by weak industrial demand. Similar problems were encountered in Europe, where, despite some improvement in recent months, Spectris continues to record low levels of growth.
However, Spectris’s performance in Asia Pacific and the Rest of the World was much better. In those regions it recorded a rise in LFL sales, while making strong progress with its cost savings programme. Spectris expects to deliver £10m in cost savings for the full year through its new strategy, ‘Project Uplift’. In addition, Spectris has the financial strength to undertake further acquisitions following its purchase of Millbrook Group for £122m. Its integration is progressing well and similar deals could help to offset the difficult trading conditions being experienced in Europe and North America.
While Spectris currently yields only 2.5%, its dividend growth potential is significant. Dividends are covered 2.3 times by profit, which shows that shareholder payouts could be raised at a faster pace than earnings growth and yet remain highly affordable. Furthermore, Spectris is forecast to increase its bottom line by 26% in the current year and by a further 10% next year. And with the potential for upgrades to those forecasts thanks to weaker sterling, Spectris’s dividend growth potential could exceed current expectations.
Of course, income investors may prefer to buy a higher yielding stock right now, given the prospect for higher inflation in 2017. One appealing stock in this regard is BAE (LSE: BA). The defence company yields 3.6% from a dividend which is covered 1.85 times by profit. BAE has bottom line growth potential as a result of the scope for US and global defence spending to rise under a Trump administration. Although Trump’s policies are yet to be confirmed, he has indicated in recent months that the US will raise defence spending and expects NATO allies to do the same.
As such, BAE’s dividend growth prospects are bright. When combined with its relatively high yield, this makes it a sound income choice. While Spectris’s income appeal may be less obvious at the present time, its dividend growth prospects mean that it is set to become a popular income stock.
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Peter Stephens owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.