What do you look for in a dividend stock? I reckon it’s a mistake to just focus on today’s biggest yields, as there’s no guarantee they’ll continue, and we should instead be looking for maximum long-term cash.
Progressive and well covered
Last year I examined housing and social care services firm Mears Group (LSE: MER) and I thought I saw solid potential. Since then the shares have done well — from a low in June 2016 they’ve put on 43% to today’s 506p. And we’re still looking at decent growth characteristics, with a 26% rise in EPS forecast for this year and an attractive PEG as low as 0.5.
Tuesday’s 2016 results impressed me, with revenue up 7%, pre-tax profit from continuing activities up 13%, and normalised diluted earnings per share up 9%.
Chief executive David Miles spoke of “increasing blurring of the boundaries between social, affordable and private rented housing“, and reckons the firm is “well placed to benefit from a healthy and wider pipeline of opportunities” — and I can see the private social care market as being one with significant possibilities in the coming decades.
I was especially pleased to see the company lift its full-year dividend by 6% to 11.7p per share, while keeping it below EPS growth and so maintaining strong cover — and it comes after a 10% rise for the previous year, and a 13.6% hike in 2014.
The yield is only 2.3% on that 506p share price, but a progressive policy that grows dividends ahead of inflation is, in my view, the thing that long-term income investors should be looking for. If Mears can keep its dividend growing even at only 6% per year, in 10 years time it would be worth a yield of 4.2% on today’s share price — and I expect to see some satisfying share price growth too.
Big and reliable
If you want a big yield today, Petrofac (LSE: PFC) has just announced a 2016 full year dividend of 65.8 cents per share, which corresponds to 52.8p at today’s exchange rate, for a 5.8% yield on a share price of 916p.
The dividend has admittedly been pegged at that level for four years in a row now, when what we really want is to see prospects for a long-term rise. So do we have that?
In the words of chief executive Ayman Asfari, what we’ve seen is “record revenues, significant cost reduction and strong cash generation“, and he says the firm is now positioned well “for a recovery in our core markets“.
We all know the oil business has been hit hard by the crash in prices for the slimy black stuff. But Petrofac, which provides infrastructure and services to the oil and gas industry, has weathered the storm remarkably well and has maintained its dividends throughout the downturn.
Petrofac is not doing too badly on the balance sheet front either, with net debt at December 2016 of $617m. That’s 10% down on 2015, and for a company with a market cap of nearly $4bn, and which showed an underlying net profit of $421m, I see no big problem there.
Even if oil prices take a couple more years to get back above $75 per barrel, we’re in a recovery phase for the industry, and ‘picks and shovels’ firms like Petrofac should do well. I see it as a great dividend pick for the next 10 years.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.