The Motley Fool

Forget SXX! I’d invest in this dividend-growing company instead

Anglo American’s potential offer for Sirius Minerals looks set to save SXX shareholders from the total wipe-out of their investments. However, I’ll continue to watch from the sidelines because I don’t own shares in either company and don’t wish to become involved now.

Instead, I like the look of XP Power (LSE: XPP) right now, which is a developer of critical power components for the electronics industry. The company designs and makes power controllers for converting mains power into the correct form for equipment to function.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

A strong niche in the market

The business enjoys a strong-looking niche in the market and typically designs power control solutions into the products produced by major blue-chip Original Equipment Manufacturers (OEMs). The industrial market accounts for around 47% of sales, and 24% come from the healthcare sector. Semiconductor Equipment Manufacturing delivers about 18% of overall sales and 11% come from the technology sector.

Getting a design win is always good news because annual revenues then flow for the duration of the life cycle of the customer’s product, which is typically around five to seven years. Operations cover Europe, North America and Asia.

The share price chart shows a stomach-churning retrace of just over 40% between the summer of 2018 and late winter 2019. I reckon the drop was driven by weakening earnings, but City analysts project a bounce-back in earnings ahead and ongoing progress with revenue and cash flow. The shares have been tearing back up towards their 2018 highs.

Meanwhile, despite the wobbles, dividends have remained steady through the period and today’s fourth-quarter trading update is encouraging. The intake of orders during the final three months of 2019 has been “strong” and there was an “acceleration” in positive trends in the business across all the firm’s sectors. Indeed, XP Power has been shipping products “above” normal rates since mid-November.

Falling debts, rising dividends

Net debt is around 20% lower than a year ago, at just under £42m. The improvement arose because of foreign exchange movements and “the phasing of working capital over the year-end.”

I reckon it’s always worth keeping an eye on debt levels, especially with companies such as XPP, which have a degree of cyclicality in their operations. Generally, I like to see debts falling when trading is going well because any future downturn in business will be more easily survived without the yoke of large borrowings.

There’s good news about the dividend. The directors expect to raise it by 7% for the year. To me, that signals their satisfaction with current progress and optimism about the outlook. Meanwhile, the shares look perky on today’s news and with the share price close to 3,390p, the forward-looking earnings multiple for 2020 is just over 20. That’s not a bargain-basement valuation, but XPP looks like a quality enterprise, to me.

I’d try to pick up a few shares on dips and down-days and collect the anticipated dividend yield, which is running near 2.7%.

A top stock with enormous growth potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business.

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 alone it returned a whopping £151.1m to shareholders in dividends and buybacks!

And here’s the really exciting part…

We think now could be the perfect time for you to start building your own stake in this exceptional business—especially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Stock… free of charge!

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