Today’s half-year results from technological products and components manufacture Smiths Group (LSE: SMIN) are unremarkable, but the firm also confirmed a strategy that could unlock value for investors and boost returns going forward — more about that if you read on.
Compared to the equivalent period last year, revenue rose 2% and adjusted earnings per share eased back by 1%. The directors pushed up the interim dividend by 2.2%, suggesting a steady and reserved hand on the tiller.
A mixed bag of outcomes
Chief executive Andy Reynolds explained in the report that the firm’s John Crane, Flex-Tek and Smiths Interconnect divisions delivered “sustainable growth” in the period, but that was “partly” offset by a decline in Smiths Medical and the timing of deliveries in Smiths Detection. However, both underperforming divisions are “on track” to grow in the second half of the year.
Looking ahead, Reynolds expects the firm to deliver “sustainable” underlying revenue growth of “at least 2%” during the rest of 2019 powered by current trading of the four industrial technology divisions and by an increasing contribution from new product launches in Smiths Medical.
In the medium term, the directors are “confident” that Smiths can grow faster than its markets. Meanwhile, over the past five years, the dividend is up around 15%, which is unspectacular. But in a separate announcement, the company confirmed its attention to make a move that could enhance investor returns going forward.
This move could change everything!
The firm plans to demerge the Smiths Medical division to create two “stronger, industry-leading companies.” The process is set to be completed during the first half of 2020 and typically in such situations, existing shareholders will end up with shares in both companies.
The spun-off enterprise will be quite a large beast. In these interim results, the medical division was responsible for just over 27% of overall revenue and around 40% of total operating profit. Reynolds explained in the announcement that he expects the proposed demerger to create two stronger companies “each focusing on accelerating the execution of their plans and maximising the opportunities in their respective markets.”
Plans are advanced and the company is already pursuing recruitment of a Smiths Medical chief executive and has drawn up a timetable and work stream plan for the demerger. When a new boss gets his feet under the desk, the firm plans to flesh out and begin developing the new strategic plan for Smiths Medical.
An exciting development
I think it’s an exciting development in the company and could lead to two smaller firms with greater and more-focused entrepreneurial drive. Simplification and focus on a narrower area is almost always the right thing to do in business, in my view, because it can lead to greater efficiencies and organisations that are able to respond faster to opportunities in the market.
Meanwhile, with the share price close to 1,471p, the forward-looking earnings multiple sits just below 14 for the trading year to July 2020, and the anticipated dividend yield is almost 3.3%. I think the stock is attractive.
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Kevin Godbold has no position in any share 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.