Shares in shipping services business Clarkson (LSE: CKN) sank by nearly 20% in early deals this morning after the company issued what can only be described as a severe profit warning.
The company noted that the “challenging environment in shipping” has resulted in “transactions being pushed back within the financial segment” compounding weakness in other areas of the business. As well as this, the firm has “suffered from lower freight rates within the tanker market and a fall in the value of the US Dollar.” All of these factors have combined to form the perfect storm for Clarkson. Management now expects profits for the first half and the full year to be “materially below those of last year.“
Re-rating of the shares
Up until today, the City had been expecting Clarkson to report earnings growth for the full year of 17.3%, following an increase of 14% last year.
With this double-digit growth rate expected, the market was placing a high valuation on the shares of 22 times forward earnings. However, now management has warned that income is set to fall, it’s clear the stock deserves a lower valuation, which explains today’s decline.
Falling earnings could also jeopardise Clarkson’s dividend growth. Analysts had been predicting payout growth of 11% for this year, followed by growth of 8% for 2019. Depending on how severe the earnings decline is, management might be forced to put further dividend expansion on ice.
With this being the case, I would avoid Clarkson in favour of BBA Aviation (LSE: BBA).
BBA is benefitting from the rising demand for air travel and related services around the world. If the company hits City targets for growth this year, over the past six years the enterprise will have grown net profit by 160%, thanks to a combination of both organic and bolt-on growth.
It seems management is confident of hitting this target. At the beginning of March, alongside full-year 2017 numbers, interim CEO Wayne Edmunds declared “the board remains confident of good growth in 2018 with a good pipeline of further investment opportunities.“
In other words, it looks as if BBA has a much brighter outlook than Clarkson and this is good news for dividend investors. City analysts are expecting BBA to announce a full-year 2018 dividend payout of $0.14 per share, giving a prospective dividend yield of 3.2% at current prices. The distribution will be covered an estimated 1.8 times by earnings per share, leaving management plenty of headroom for further payout increases in the years ahead.
What’s more, as the outlook for the aviation industry is much more positive, and in my view, more stable than that of the shipping industry, BBA is, in my opinion, a much better long-term investment than Clarkson as it should be able to continue to grow earnings at a steady rate for many years to come. Clarkson meanwhile will always struggle in the unpredictable, cyclical shipping industry, which is not a good backdrop for dividend growth.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. 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.