It’s an unfortunate truth, but some dividend hunters are too greedy for yield, reaching for the fattest payout regardless of the company generating it. In my experience, this strategy invites cuts and loss of capital.
Instead of searching for highest cheque, I advise you to find sectors with economics that increase the likelihood of a long-term payout. Today, I’d like to introduce you to an industry that not only puts on a show, but also generates a steady flow of dividend-facilitating cash while doing it.
At first glance, trade shows seem like they’d be bad for dividends. Events are often held once every two years so one would expect cashflow to be lumpy.
But many trade show operators run a number of shows every year and customers often book months in advance. Paying upfront is the norm, which means many companies in the industry have negative working capital cycles. In other words, they get paid before they render services.
Of course, not everyone books early, but operators usually have a good idea of attendance figures months in advance, allowing them to tailor costs like catering, rent and entertainment to maximise profit margins.
Furthermore, the top dogs in the industry seem to have an unwritten agreement to leave each other be. A contested niche is not a profitable one and — more often than not — the operators are careful not to enter competitive markets.
Perhaps more importantly, the business model has an enduring appeal. Skype still can’t compare to face-to-face networking and product testing and likely won’t for some time yet.
These wonderful economics facilitate good dividends, usually alongside growth. Experts at working to a budget, these companies earn a high profit margin on the cash they receive upfront and expand quickly.
UBM (LSE: UBM), the second largest trade show organiser by revenue globally in 2016 is well diversified, serving a wide range of sectors across China, Europe and North America, as well as a developing Rest of the World portfolio.
The company is unlikely to be crippled by a downturn in any individual sector. From Transports and Logistics to Advanced Manufacturing and Technology, UBM’s wide-reaching portfolio is certainly a comfort to investors.
It has finally disposed of its media assets to become a pureplay tradeshow firm. The £490m proceeds were used to fund a £243.7m special dividend and the acquisition of Allworld Exhibitions $485m (£392.9m). A further £82.7m was spent on bolt-ons to bolster the company’s core events.
The company currently offers a 3.1% yield covered 1.6 times by free cashflow. If the company hits forecasts this year, the shares would trade on an EV/EBITDA of 11.2, which seems incredibly cheap to me given the company’s growth record.
Founder-led and owned Tarsus Group (LSE: TRS) operates shows from 4D printing to stationery, like labels. The company is far smaller than UBM, but is growing fast.
Last year, it snapped up Connect Meetings LLC for $57m which transformed Tarsus by adding a US market-leading portfolio of business travel exhibitions to its collection.
The company sports a 3.14% yield, but given the £70m net debt pile I would be in favour of cutting this for a few years to free up cash to either strengthen the balance sheet or fund bolt-ons.
Regardless, in five years time, I see Tarsus paying a big dividend.
Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended Tarsus Group and UBM. 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.