I like the way CareTech Holdings (LSE: CTH) has raised its dividend over the last few years and I’m reassured by the property-backed balance sheet. Today’s full-year results from the UK-focused specialist social care services provider reveal net tangible assets of around £120m, which compares to a market capitalisation of £321m. Meanwhile, the overall property portfolio has a valuation of £329m.
An agenda for growth
On top of these basic value credentials, CareTech raised £37.4m in March to accelerate its programme of growth by funding the acquisition pipeline and organic growth projects. I think that’s a good idea because trading is steady and the company operates in a sector with constant demand. The firm has a good record of robust incoming cash flow that supports profits well. Doing more of the same could enhance the value for those holding the shares. Back in March, the directors promised to put the extra placing funds to work within one year, so I’m optimistic about the immediate outlook now.
Chief executive Farouq Sheikh tells us that some of the funds have already been used to acquire Selbourne Care during June and to move organic initiatives forward including property purchases and reconfigurations. But there’s more to come. The top executive said: “We enter the current financial year with strong underlying cash flow, solid organic growth and a sizeable pipeline of opportunities, which together give us confidence in continuing to deliver our exciting growth strategy.”
Today’s numbers suggest that the pot is boiling nicely. Revenue lifted more than 11% compared to a year ago, underlying profit before tax put on almost 13% and underlying basic earnings per share came in flat, which isn’t bad considering the dilution caused by the share placing. Pleasingly, the firm’s net asset value rose almost 35% during the year and the directors crowned all these financial achievements with a 7% hike in the full-year dividend.
CareTech strikes me as a solid, growing firm operating in a defensive sector, and I’d much rather take my chances with the shares than I would with a stock that I see as being in long-term decline such as Tesco (LSE: TSCO). These days, I think of Tesco as a dinosaur struggling to survive in a changing world. The firm was caught out clinging to an out-of-date business model that just won’t work to keep the firm at the top of the pile any more.
The imminent takeover of Booker Group shows that Tesco is adapting and changing to counter the onslaught form fast-rising discounters such as Aldi, Lidl and others. Earnings resurged from their nadir this year, and City analysts expect more progress next year. I wouldn’t expect the firm to collapse without a fight. However, I think the tide is still against Tesco and the most likely long-term outcome is a prolonged period of managed decline rather than a new epoch of growth.
Why I think the price is wrong
That’s why, at the current 204p share price, I’m concerned about the forward price-to-earnings ratio running at almost 16 for the year to February 2019 – I see it as too high. Dividends are being reinstated this year but at a shadow of their previous level, and I just don’t think Tesco deserves such a growth-like valuation, so I’m shunning the stock.
I’d rather trust CareTech’s long record of paying steady dividends than I would Tesco’s recent return to dividend paying. Tesco could face a valuation down-rating and I’m not prepared to take the risk. Indeed, guarding against potential drawdowns in your portfolio is the most important work you can do.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.