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I’d buy and hold this quality FTSE 250 dividend growth stock forever

In my ongoing search for quality dividends, today I’m looking at the FTSE 250 company Spectris (LSE: SXS), which makes measuring instruments and controls for technically demanding industrial applications. The company serves markets all over the world and enjoys a well-balanced geographical spread of business.

The website tells us that Spectris aspires to be a leader in niche markets with high barriers to entry. I like the language. It reminds me of Warren Buffet’s approach to investing in quality companies and some of the things he looks for. The firm reckons it aims to maintain its edge in the market with customer focus, continuous improvements and “strong” intellectual property.

Scores well on quality indicators

I think the financial indicators relating to business quality back up the company’s claims. The return-on-capital figure runs close to 23% and the operating margin at about 22%. Meanwhile, there’s a long record of robust and generally rising cash inflow, which provides heavyweight support for profits and for that all-important dividend. The dividend has increased by some 55% over six years, which is a decent amount of progress and one of the key attractions of the share, in my view.

I find today’s full-year report encouraging. On an adjusted basis, sales increased 5% compared to 2017 and earnings per share lifted 7%. The directors described the performance as “slightly ahead of expectations,” and they signalled their confidence in the outlook by pushing up the total dividend for the year by 8%. However, chief executive Andrew Heath did sound a note of caution in the report, saying that sales growth is likely to moderate in 2019 because of a more cautious macroeconomic outlook.

But the company will not be coasting along because it plans to squeeze more profit from the enterprise by focusing on productivity and operational efficiency. Heath expects to see a £15m-£20m benefit from the “profit improvement programme” during 2019 and, to put that in perspective, the pre-tax profit reported today is just above £241m.

Change at the top and a strategic review

Heath is new to the business, having only put his feet under his desk in the autumn, and I see that as a positive. A new broom often sweeps clean, and new leadership can usher in renewed vigour and determination at the top in any company. Indeed, a recent strategic review has identified that the firm could benefit from becoming a “more focused and simplified business.” 

I think simplification in business operations is almost always a good thing. The review has also focused in on what parts of the enterprise are scalable –which is another word I like to hear. The idea is to pin down areas of the business “with strong capabilities and the greatest performance potential,” which can expand into high-growth markets.

The good news is that three of the company’s businesses have been identified as fitting the bill in Malvern Panalytical, HBK, and Omega, which together account for more than 60% of sales and adjusted operating profit already.

When you buy the shares of any company your investing outcome depends on the forward prospects of the enterprise. On that score, I think Spectris looks well placed and is building up a lot of potential. I’d be more than happy to make a long-term investment to see what happens next.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Spectris. 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.