FTSE 250 bus and train operator Go-Ahead Group (LSE: GOG) has been a sleepy stock for some time – until now. Today’s trading update caused the share price to shoot up 10% in early trading, suggesting the market likes what it reads.
No dividend cut in 25 years
But there’s been a lot to admire about the company for a long time. Roland Head pointed out recently that the firm hasn’t cut its dividend since listing on the stock market in 1994. On top of that, the public transport business delivers Go-Ahead consistent cash inflow, and the return-on-equity that operations generate is running around 15%.
The firm gets its cash inflow in a timely manner too. Customers don’t get to use bus and train services until they’ve paid for them. But the sector has its challenges and profits have been erratic over the last few years, which has led to weakness in the share price. Even after today’s 10%-plus rise, at around 2,070p, the stock is well below its peak of three years ago above 2,600p.
And although it hasn’t been cut, the dividend’s been essentially flat for two years and City analysts forecast only very modest upward movement in the current trading year to the end of June and the year ahead. However, the yield is running close to 5% and the forward-looking price-to-earnings ratio for the trading year to June 2020 is around 12.5 after today’s rise.
Full-year expectations improved
The update covers the period from 30 December to 5 June and the company reports it has achieved “high levels” of punctuality across all its divisions. But the news that could be driving the share price spurt today is that the directors have “increased” their full-year expectations in the London and International bus division “due to strong operational performance,” including, they say, in Singapore and Dublin. There’s also been growth in passenger volumes in all the firm’s regional bus businesses, although full-year expectations are unchanged.
In the rail division, the company is about to launch German rail contracts “following a four-year mobilisation period.” Meanwhile, Southeastern is the UK’s best-performing large train franchise, the directors reckon, “with the highest levels of punctuality in its history.” With the GTR franchise, punctuality for the month of April was 89.3%, “after nine consecutive months of year on year improvement.”
Chief executive David Brown explained the company has seen revenue growth in all three of its divisions. I think that’s encouraging because profits could follow, and such progress is likely to feed into a rising dividend. We could see a sustained move up in the share price as well, as long as the firm keeps on making progress.
Last year, around 34% of the firm’s operating profit came from its Regional bus division, 33% from London buses, and 33% from Rail. We’ll find out more about progress with the full-year results due on 5 September. In the meantime, I’m tempted to pick up a few of the shares to collect the dividend.
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.