Shares in Johnson Matthey (LSE: JMAT), a sustainable technologies company, are currently changing hands for around 2,610p. This should gain the attention of income investors.
With an increased interim dividend of 24.5p per share already declared, the final dividend, assuming 5% growth, could be 65.4p, giving an anticipated total 2020 dividend of 89.9p. Dividing 89.9p into the share price of 2,610p reveals a 3.44% forecasted dividend yield, which is attractive. Considering that JMAT has a history of increasing its dividends, the yield could well rise in the future.
Average reported earnings per share at JMAT are 189.8p, measured over the last five reported years. The stock is, therefore, trading at a little under 14 times earnings. The FTSE 100, the index JMAT is in, trades at around 15 times earnings on average.
At the current share price, JMAT offers an attractive dividend yield and is somewhat cheaper than the market average.
Buy the future, not the past
A new investor in JMAT, will, at the very least want that dividend maintained. Growth in the dividend would be better, but they cannot keep growing faster than profits, as eventually, a firm would be paying out more than it earns.
For the last full year, dividend cover at JMAT was 2.52, which means it paid out about 40% of its profits as dividends. However, JMAT has not demonstrated consistent growth in its reported earnings over the last five full years.
JMAT uses precious metals, like palladium, rhodium, and platinum, to make catalytic converters. These metals have become more expensive, which hurts JMAT’s margins. However, in the medium term, JMAT does see good revenue growth for convertors as new clean air regulations come into force in India and China.
After 10 or so years, the expected penetration of electric vehicles (EV) is likely to weigh on growth in internal combustion engine sales, and hence catalytic convertors. However, JMAT has some impressive battery technology in the pipeline. Production of these ultra-high-energy density cathodes is due to start in 2024, and will serve the EV market.
JMAT also manufactures active pharmaceutical ingredients for a variety of treatments, lithium-ion phosphate materials (for batteries), fuel-cells, medical device components, and catalysts for the pharmaceutical and agricultural chemicals markets. I like the company’s manufacturing base. It is focused on healthcare and clean-technology, which is a good place to be right now.
A number of one-off expenses have been a drag on earnings in recent years. There are new convertor plants being constructed in Poland, India, and China. New battery technology is being commercialised, and precious metals refining centres modernised along with IT systems.
Over the medium to long term, these expenses should pay off with increased revenues and profits.
If you look at a five-year price chart for JMAT, you’ll see that it appears to oscillate around the 3,000p mark. When JMAT’s share price falls, its dividend yield rises. Income investors buy the stock, raising the price and lowering the yield to unattractive levels. Then buying stops, perhaps some selling starts, and the price drifts lower, before the cycle starts again.
Given JMATs dividend history – they have increased every year since at least 1999 – it is not surprising that income investors covet it. I believe dividends will continue to grow, and right now, this stock looks a worthy candidate for an income-generating portfolio.
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James J. McCombie has no position in any of the shares 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.