Burberry (LSE: BRBY) may not be the first company you think of when dividend aristocrats are mentioned, but the company has all the hallmarks of a business that could become a long-term dividend champion.
Shares in Burberry have fallen this week after the company announced that total revenues slipped 1% at constant currencies during the six months to the end of March. That was on the back of a shrinking US market and Burberry’s “destocking” of its beauty range as it prepares for a new licensing partnership with cosmetics group Coty.
However, despite this marginal decline in revenue, the group remains a cash machine. For the six months to September 30 2016, the company generated a free cash flow of £75m, in a seasonally weak half. Burberry usually produces the majority of its earnings in the second fiscal half, which covers the crucial Christmas trading period. For example, for the year ending March 31, 2016, the group produced a free cash flow of £273m. With almost no debt and cash of around £700m, management can return all of the cash the company generates from operations to investors. Dividends will cost the company approximately £170m this fiscal year and to speed up cash returns management is also repurchasing stock.
Shares in Burberry only yield 2.1% at present but the payout is well covered by earnings per share (1.9 times), and with so much cash on the company’s books, it looks as if the dividend will be safe even in an economic downturn. Put simply, even though Burberry may not look like a dividend champion at first glance, the company’s cash generation, rock solid balance sheet and high dividend cover are all indications that this is one dividend stock that won’t let you down.
If Burberry continues at its current pace, buying the shares for income today should produce impressive results in five to 10 years time.
Like Burberry, Spirent Communications (LSE: SPT) does not look like a dividend champion at first glance. Shares in the company currently support a dividend yield of 2.5%, and the payout is only just covered by earnings per share. However, over the next three years, City analysts expect the company’s earnings per share to grow by 42% and the dividend by almost 20%.
What’s more, like Burberry, Spirent is a cash cow. Over the past five years, the company has generated an average free cash flow per annum of $39.4m and paid $24m per annum in dividends to shareholders. The firm has no debt and nearly $100m in cash.
If Spirent continues on its current course, within a few years, the firm will be a dividend champion and buying today will allow you to profit from the company’s rise. The shares may not look cheap at 28 times forward earnings, but dividend growth will more than make up for the lofty valuation in the years ahead.
On the road to a million
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.