Serial dividend raiser Headlam Group (LSE: HEAD) delivered a robust set of interim results this morning with revenue up 4% and profit before tax 11% higher compared to a year ago.
The firm describes itself as Europe’s largest distributor of floor coverings and buys from floor covering manufacturers before selling to independent floor covering retailers and contractors. That’s a cyclical business for sure, but the firm is expanding and so far, the dividends keep rolling in for investors.
Around 86% of revenue comes from the UK with the remaining 14% from France, Switzerland and the Netherlands. During the period, like-for-like sales improved by 2.1% in Britain and 3% abroad, suggesting demand remains strong. But as well as organic growth, the company is expanding its network with bolt-on acquisitions and completed two in the UK in the first half of the year that expand operations into new geographic locations.
The firm is trading well and net funds increased a healthy 47% or so compared to last year, to almost £50m, money that the company could need to see it through any economic slowdown in the future. However, the directors are optimistic about the outlook and marked their confidence by pushing up the interim dividend 12.7%.
The anticipated total dividend for 2017 is some 77% higher than five years ago, which I think is attractive growth in the payout. As long as trading holds up, the firm’s strong cash position suggests plenty of potential for further dividend increases. The shares are up a smidgeon today as I write at 576p, which throws up a forward price-to-earnings (P/E) ratio just below 14 for 2018, and the forward dividend yield runs a little over 5.5%. Anticipated earnings should cover the forward payout around 1.3 times.
If I didn’t know the company’s operations were cyclical this would be an easy ‘buy’. However, the immediate outlook is good so I’d still be happy to buy the shares now and then remain vigilant for any future deterioration in the economic outlook.
Impressive dividend yield
Perhaps Headlam would make a good companion in my portfolio for big-cap dividend-payer AstraZeneca (LSE: AZN). The pharmaceutical giant has an impressive dividend yield running at 4.9% for 2018, and City analysts following the firm expect forward earnings to cover the payout around 1.35 times. Meanwhile, at today’s share price around 4,406p, the forward P/E rating runs at just over 15.
Apart from the David-and-Goliath difference in the size of the two companies’ market capitalisations, a big differentiator is that the pharmaceutical sector is known for its defensive characteristics, so AstraZeneca is theoretically less prone to the negative effects of economic downturns than Headlam.
But AstraZeneca has had its problems, not least the multi-year run of declining earnings we’ve just seen. This was caused by many of the firm’s best-selling and profitable products running out of time on their patent protection, which allowed cheaper competition to swamp the market. That’s another kind of cycle, I reckon, but AstraZeneca’s development pipeline is helping the firm recover and earnings look like they have halted their decline. On balance, I think the firm looks attractive for its dividend.
Protecting the downside
If you are aiming for financial independence or a wealthy retirement with investing, perhaps guarding against potential drawdowns in your portfolio is the most important work you can do.
I think that Headlam and AstraZeneca could help with that with their robust-looking dividend streams. But however you see things, I recommend the Motley Fool analysts' new report called The Foolish Guide To Financial Independence, which signposts other ways to make your investments work hard.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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.