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Why I’d buy shares in this property-backed dividend grower and hold for 10 years

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UK-focused specialist social care services provider CareTech Holding  (LSE: CTH) has done it again. In today’s full-year results report, the firm proposed an increase of just over 11% in the total dividend for the year. That follows a string of annual increases in the payment to investors stretching back for years – the company hasn’t missed a beat.

CareTech provides specialist support for adults and children who have a “wide range of complex needs.” The company has more than 200 properties in the portfolio, which provides a big chunk of the net asset value on the firm’s strong-looking balance sheet.  

Good figures

Given the rise in the dividend, today’s figures are predictably good. Revenue rose almost 12% compared to the previous year, underlying pre-tax profit also lifted nearly 12%, cash from operations increased by nearly 40%, and underlying earnings per share eased back almost 7.8%. The figures have been affected by the firm’s October takeover of Cambrian Group, a provider of specialist behavioural health services for children in the UK, which will have increased revenues along with the share count because of the additional shares issued as part of the deal.

Despite the big changes in operations during the year, CareTech reported net debt unchanged year-on-year at £147m, which is put into perspective by an independent property re-valuation that puts the worth of the firm’s property estate at £424m.

As a property-backed potential investment, I think CareTech has a lot going for it because it also operates a cash-generating care business with a consistent track record of delivering good financial results.

Executive chairman Farouq Sheikh explained in the report that over the 25 years of its existence, CareTech has grown from a focus on adults with learning disabilities towards also looking after young people and children with complex needs “across a range of settings.” He said the firm focuses on “the most complex and vulnerable young people” for which there is a market of more than £10bn in the UK. He reckons there is an undersupply of specialist beds in the niche sector with the market growing at nearly 3% per year, which I think bodes well for the future growth of the company. 

An impressive ongoing growth story

The growth story is impressive. Since joining the FTSE AIM market around 13 years ago, capacity has increased “six-fold” and diluted earnings per share have shot up by more than 750%. Looking forward, Sheikh said the firm has “major” plans to invest in 2019 and beyond, with “key new organic developments and bolt-on acquisitions.” The firm also has plans to explore opportunities abroad and is targeting ongoing “double-digit” growth in underlying earnings per share.

Today’s share price close to 348p values the company at a forward earnings multiple of just over 9.6 for the trading year to September 2019. The projected dividend yield is almost 3%. That payment should be covered almost three-and-a-half times by expected earnings, suggesting the directors see plenty of room for further growth, otherwise they would probably return more of the firm’s cash to investors rather than reinvesting into the business. I think the valuation is attractive and CareTech is well worth your further research now. I’d aim to hold this firm’s shares for the next 10 years, or so.

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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.