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Is this the best dividend stock in the FTSE 100?

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One of the former star stock-picker Neil Woodford’s favourite investments is Eddie Stobart Logistics (LSE: ESL). It’s also one of his most troubled businesses.

In a shock announcement at the end of August, the company said it was suspending its shares following a review of the accounts. Management believes this ongoing review will lead to a substantial readjustment in reported earnings before interest and tax, according to the company’s press release on the matter.

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As a result, management also warned it will be reviewing Eddie Stobart’s dividend policy. Immediately following the announcement, the shares were suspended from trading, and have remained so.

However, today, the story took another turn. Responding to media speculation over the weekend, the company announced it had received a “preliminary expression of interest” from the private equity group DBAY Advisors Limited regarding a possible issue for the business. As of yet, there’s no certainty an offer will be made, but DBAY now has until 5pm on 7 October to make a final decision.

If it does decide to acquire Eddie Stobart, this could be a boon for shareholders. This time last year, shares in the logistics business were changing hands around 123p, 76% above current levels. I think it’s highly likely an offer, if it does emerge, will be substantially above the current share price.

An FTSE 100 dividend champion

If Eddie Stobart is taken off the market, an excellent replacement in your is portfolio could be Johnson Matthey (LSE: JMAT). I think this is one of the best in the FTSE 100 for a couple of reasons.

First of all, the business is a leader in the speciality chemicals business. This is a highly regulated and niche company, where reputation counts for everything. Johnson has been in business since 1891, giving it a substantial competitive advantage over smaller, younger competitors.

Secondly, management has been pursuing a conservative dividend policy. For example, the company’s current dividend per share (89p) is covered 2.7 times by earnings per share, and it’s been that way for roughly the past 10 years. The dividend has grown at a compound annual rate of around 5.5% over this time, roughly in line with earnings growth. Net gearing — a gauge of balance sheet strength — was just 33% at the end of its fiscal 2019. So it appears the firm has a moderate level of borrowing and a strong balance sheet.

These numbers tell me that while Johnson Matthey’s current dividend yield of 2.9% might not be the highest around, it’s exceptionally safe. Earnings would have to fall by more than 50% for the dividend to come under pressure. Considering its reputation and competitive advantage, I think that’s unlikely.

Still, even if it earnings do fall 50%, Johnson Matthey has plenty of financial headroom on its balance sheet to borrow money and make up for any short term cash shortfalls. That’s why I think this could be one of the best dividend stocks in the FTSE 100.

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Rupert Hargreaves owns no 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.

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