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Up 375% in 10 years. Should you buy this dividend-raising stock now?

I’ve always liked Vimto brand owner Nichols (LSE: NICL), the soft drinks business, which sells to more than 85 countries. But I’ve never bought any of the firm’s shares.

That’s been a big mistake on my part. The share price is around 375% higher than it was 10 years ago and there’s been a stream of rising dividends to collect along the way for shareholders.

I always knew the firm had the kind of defensive business that could generate generally rising revenues, earnings and cash flow – ideal for supporting a dividend that goes up a bit each year. And that is exactly what Nichols has delivered. It would have been a cracking long-term buy-and-hold investment, but the valuation always seemed a little too expensive, to me.

Consolidation?

However, although the underlying operations have continued to make progress, the share price has moved broadly sideways for around three years and it could be a good time for me to revisit the stock. With the share price close to 1,420p, the forward-looking earnings multiple for 2020 is just over 19 and the anticipated dividend yield is around 3%.

Not a bargain-basement valuation, but City analysts following the firm predict mid-single-digit-percentage increases in the dividend ahead. Meanwhile, the quality metrics remain robust, with the operating margin and the return-on-capital figure both above 20%. And the balance sheet is strong – Nichols runs a net cash position.

Such slick finances have been created by the company’s branded products in the Still and Carbonate categories, such as Feel Good, Starslush, ICEE, Levi Roots and Sunkist. And the lead Vimto brand is popular in the UK and around the world, “particularly in the Middle East and Africa.”

Today’s update covers trading during 2019 and there was modest growth in the top line with revenue increasing by 3.6% compared to the previous year. All three areas of the business grew, the company said in the report. The directors put the progress down to the benefits of a “strong” diversified operating model.

Confident directors – nice!

Chairman John Nichols said in the report that the directors are pleased with the sales progress during the year and the Vimto brand “performed very well in the UK, despite strong prior year comparatives.” Looking ahead, the directors are “confident” the firm will make long-term progress. And so am I. The long-term trading and financial records are steady, and this is exactly the kind of vehicle I’d aim to use for compounding funds for my retirement pot.

Despite the 375% rise in the share price over the past decade, I’d aim to buy some of the shares during periods of stock market pessimism, or when short-term issues knock the price back. After that, this is one I’d tuck away and forget about for the next 10 years while reinvesting the dividend income along the way.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Nichols. 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.