It’s true that there’s plenty of blue-chips with bigger dividend yields than Spirax-Sarco Engineering (LSE: SPX).
In fact, if I was to tell you that this FTSE 100 stock yields just 1.4% for 2019, a figure that sits well below the broader forward average of 4.5% for Britain’s blue-chip index, you may well think that I’m punchy to consider this a terrific income share. Why pick this over Taylor Wimpey and its 10%-plus yield, for example, HSBC and its 6% yield, or Aviva and its yield of 7.5%?
Rip-roaring trading results
These are all great stocks for income seekers but this doesn’t mean that Spirax-Sarco can’t also be considered a delicious dividend champion. Why? Well, the rate at which the engineer has lifted ordinary dividends in recent times (up 55% over the past half a decade, in fact) and has dished out special payouts in the past five years too, that’s why.
And judging by its most recent financials, this business, which designs technologies to control and harness the power of steam and industrial fluids, would appear to be in great shape to keep supercharging dividends for some time yet. Revenues tore 15% higher in 2018 to £1.15bn while adjusted pre-tax profit galloped to £254.6m, up 11% year-on-year.
And why am I confident that profits can keep on climbing? Well, the strong sales growth that Spirax-Sarco is witnessing across all of its divisions, allowing turnover at group level to continue outperforming the broader market. On top of this, the Cheltenham company’s commitment to acquisitions should also help the bottom line to keep expanding in spite of tougher times, like that of heating and temperature product specialist Thermocoax which was sealed last week.
City analysts are expecting profits growth to cool a little in the medium term in reflection of slowing industrial markets, and bottom-line rises of 4% and 7% are forecast for 2019 and 2020 respectively. And this means that annual dividend growth is expected to cool a little too.
That’s not to say that payout increases are set to disappoint, though. Indeed, last year’s 100p per share reward is still expected to jump to 108p in the current period, yielding that aforementioned 1.4%. And in 2020, a 117p dividend is estimated, a figure that nudges the yield to 1.5%.
Safe as houses
As I said, these yields might not be the biggest, but on the other side of the coin, dividend projections at the engineer look a lot stronger than many of those on the Footsie on account of its bright earnings outlook and excellent cash generation (which means that net debt-to-EBITDA currently stands at just 0.8 times).
What’s more, news that projected dividends for this year and next are covered 2.4 times by projected profits, comfortably above the widely-regarded security benchmark of 2 times, should soothe the nerves of even the most cautious share pickers.
For long-term investors happy to sacrifice monster yields today for the prospect of strong and sustained dividend hikes many years into the future, I reckon this blue-chip may be one of the best.
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Royston Wild owns shares of Taylor Wimpey. The Motley Fool UK has recommended HSBC Holdings. 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.