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Forget Tesco! I’d invest in this cheaper steady dividend-grower instead

I think the Tesco share price looks elevated and the valuation needs to adjust to the reality that the company’s turnaround is complete. Big annual increases in earnings are likely over, and I’d like to see a bigger dividend yield before investing in Tesco today.

To me, Carr’s (LSE: CARR) is more attractive. The firm operates in the agriculture sector suppling things such as feed blocks and farm machinery. It also runs a chain of rural stores in the UK serving the farming community. In the engineering division, the firm makes bespoke equipment for the nuclear, petrochemical, oil & gas, pharmaceutical, process, and renewable energy industries.

A growing dividend

The financial and trading record looks steady. Earnings have been moving up a bit each year and the dividend has risen around 40% over the past five years. With the share price close to 142p, the forward-looking earnings multiple for the trading year to September 2020 is just over nine and the anticipated dividend yield is a smidgeon below 3.5%. That strikes me as a similar dividend yield to Tesco’s but for a lower valuation. And, on top of that, anticipated earnings should cover the dividend just over three times, which looks robust to me.

In today’s full-year results report, Carr’s reported a flat revenue performance for the period with adjusted earnings per share up 5% compared to the equivalent period the year before. The directors pushed up the total dividend for the year by 5.6%. Chair Chris Holmes said in the report the performance was “moderately ahead” of the directors’ expectations. And that outcome was achieved despite unseasonable weather “significantly” affecting trading in the agriculture division.  

Holmes said the firm made acquisitions “across both divisions” during the year and plans to develop Animax into “a centre of excellence for innovation and product development for the wider Agriculture division.” The business became part of Carr’s in its September 2018.

Meanwhile, in the engineering division, the order book is “strong” and the acquisition of NW Total in June 2019 provides the firm with opportunities in the nuclear defence market.

A positive outlook

Growth appears to be on the agenda, although the company reckons that confidence among UK farmers is being affected by the uncertainty about Brexit. However, the directors are confident about the outlook for the full year. And that’s despite challenging weather conditions and a slower-than-expected start to the new trading year in the engineering division because of “contract phasing.”

City analysts following the firm expect a mid-single-digit percentage advance in both revenue and earnings for the current trading year to September 2020. This investment won’t shoot the lights out with growth, but I reckon Carr’s looks attractive as a long-term dividend investment with the potential to keep growing in the years ahead.

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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.