On the face of it, Melrose Industries (LSE: MRO) is an odd choice as an income share as the company’s stock currently yields a meagre 2%. However, this headline figure belies the steady increase in payouts that has seen annual dividends rise from 1.43p in 2012 to what analysts expect will be a dividend in the range of 3.78p per share this year.
The key to dividends more than doubling in just five years has been continued success in the company’s business model of buying, improving and selling industrial businesses. Its portfolio currently consists of two businesses: specialised HVAC manufacturer Nortek and industrial turbine manufacturer Brush.
While the latter has been dinged by the downturn in oil & gas markets, the former is being improved at a rapid clip. In the six months to June, underlying operating profits from the Nortek business rose 54% year-on-year (y/y) to £145.5m as margins rose significantly. This more than made up for the weak performance of the smaller Brush energy business and led group earnings per share to more than double from 2p to 4.9p.
The appeal of Melrose for growth investors is clear, the company has a fantastic record of executing its business model and, aside from the energy portion of the Brush business, has proved prescient at exiting cyclical markets at just the right time. This should appeal to income investors as well since management has a strong record of returning a large portion of disposal proceeds to investors via dividends.
With Melrose management once again on the hunt for a new acquisition, Nortek performing very well and interim dividends rising from 0.3p to 1.4p in 2017, I see plenty of reason for income investors to take a closer look at the company today.
Successful so far
If imitation is the sincerest form of flattery then Melrose should be very happy as its buy, sell, improve business model is being replicated by £330m market cap upstart Zegona Communications (LSE: ZEG). Rather than industrials, Zegona concentrates on small European telecoms and recently completed its first disposal since going public in 2015.
The sale of its regional Spanish telco Telecable to larger competitor Euskatel was struck at €701m and made up of €186.5m in cash, the assumption of €245m of Telecable debt and a 15% stake in Esukatel itself. This was great news for income investors as, in addition to the 5p per share annual dividend, or a 2.9% yield at today’s share price, management is going through with a tender offer that will allow shareholders to sell up to 36% of their shares at a hefty premium to today’s share price. In total, the tender offer and £9.8m annual dividend will return upwards of €158m to shareholders.
Looking ahead, there’s good prospects for Zegona to replicate the success of its first deal as there are many small telecoms businesses scattered across Europe that could benefit from management’s focus on improved service levels to increase revenue and cash flow.
