The Motley Fool

This dividend growth stock hasn’t put a foot wrong in 7 years. I’d buy.

It’s been a year since I wrote about packaging products provider Macfarlane (LSE: MACF) and the share price is down around 12% at 93p today. But it’s been lower, falling as far as about 72p in December 2018.

This is a volatile one, it seems, but operationally, the company hasn’t put a foot wrong. Indeed, there’s a multi-year record of rising revenue, earnings, cash flow and dividends that extends forward with City analysts’ positive assumptions.

Good results

And I find today’s half-year results report to be encouraging as well. Compared to the equivalent period last year, revenue increased by just over 5% and diluted earnings per share moved almost 10% higher. The directors expressed their satisfaction and confidence in the outlook by pushing up the interim dividend a little over 6%.

I reckon the firm operates in an attractive sector distributing a “comprehensive” range of protective packaging and manufacturing specialist protective packaging for high value, fragile products. It also makes self-adhesive and resealable labels for companies dealing with fast-moving consumer goods.

Chairman Stuart Patterson said in today’s report the advance in sales and profits were achieved against a background of well-publicised weaker demand.” But contributions from the acquisitions in 2018 of Tyler Packaging (Leicester) Limited and Harrisons Packaging Limited helped the result, along with the May acquisition of Ecopac (UK) Limited.

Patterson explained in the narrative that Macfarlane’s strategy targets “sustainable” growth in profits by focusing on added-value products and services alongside the execution of value-enhancing acquisitions.  

Growth anticipated

The firm can trace its origins back more than 70 years and it’s just the kind of steady growth proposition I like to buy and hold. City analysts following the firm expect earnings to grow around 36% this year and 5% in 2020. Meanwhile, with the share price close to 93p, the forward-looking earnings multiple sits just over 11 for 2020, and the anticipated dividend yield is 2.9%.

That yield might not sound like much, but expected earnings look set to cover the predicted payment more than three times. If the directors wanted to they could afford to double the dividend payment. The fact that they haven’t suggests to me they see opportunities to invest for further growth ahead.

The share price has risen around 390% over the past seven years, which is a cracking outcome for existing shareholders. But assuming we’re not about to endure a worldwide general economic slump, I think there could be much more to come in the years ahead. After all, with the market capitalisation hovering around £149m, there’s plenty of room for the firm to grow into a larger enterprise, and I reckon it’s doing all the right things to get there.

I like the long-term potential of Macfarlane and would be keen to buy the shares on dips and down-days, with a long investment time horizon in mind.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called "1 Top Small-Cap Stock From The Motley Fool".

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle. Click here to find out all about it — it's completely free to do so.

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.