I’ve always liked Meggitt (LSE: MGGT) for its long-term ability to generate cash and its progressive dividend policy. It’s one of those stocks that’s perpetually on my watch list, but which I’ve never got round to actually buying. Looking at some of my actual choices, maybe that was a mistake.
A first-half update Tuesday showed solid progress across the board, with orders up 7%, revenue up 9%, underlying pre-tax profit up 7% as reported (and 2% on an organic basis), and underlying EPS up 6%.
On the basis of the strength of the first half, chief executive Tony Wood said: “We have increased our full year organic revenue growth guidance to 4 to 6% and remain on track to deliver a margin improvement of between 0 and 50 basis points in 2019.”
On the progressive dividend front, he added: “The acceleration in growth and our continuing confidence in the prospects for the group underpins our interim dividend increase of 5% to 5.55p.”
The full-year dividend is predicted to grow by the same proportion, and my view is that steady rises ahead of inflation are the true mark of a good long-term dividend.
One thing I like about Meggitt is it bases annual dividend growth on underlying long-term prospects, not on year-by-year earnings. That’s good, because the timing of multi-year contracts and payments in the aerospace and defence business is often erratic in the short term, and long-term investors need to look beyond that.
The shares have had a bullish month, and that’s raised them to a forecast P/E valuation of 16.3. But that would drop to around 14.5 on 2020 forecasts, and I think it’s a fair valuation for what I see as an attractive and safe long-term investment.
Rotork (LSE: ROR) shares got an even bigger boost from first-half results, popping up nearly 10% in morning trading, although on the face of it the figures looked mixed.
Orders dropped 1.3%, with revenue down 4.3%, though adjusted operating profit improved by 1.7% (with an operating margin up 120 basis points). Adjusted earnings per share rose by a modest 1.5%, but the company raised its interim dividend by 4.5%, “reflecting confidence in progress for the full year.”
Chief executive Kevin Hostetler says the firm should deliver “mid to high single digit revenue growth and mid 20s adjusted operating margins over time.” This is another business I think is likely to see short-term volatility as a result of the nature of long-term contracts and a cyclical side to the industry.
The flow-control specialist supplies global oil & gas, power and water businesses, and could be one to go for to protect your investments from the growing possibility of a no-deal Brexit. I suspect the defensive global nature of its business has been attracting investors. But I can’t help feeling that might have pushed the share price up a bit far.
We’re looking at a P/E of nearly 23 based on full-year forecasts which, for me, puts it pretty much in the realms of growth valuations. But it’s at a time when EPS growth is expected to fall from last year’s 19% to just 3%.
After a tough second half in 2018, I can’t help wondering if the price might be getting a bit overheated again in 2019. I think I’d wait for better buying opportunities.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt and Rotork. 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.