John Morgan, chief executive and founder of the Morgan Sindall Group (LSE:MGNS), along with bosses of other construction companies such as Mace and Kier, recently called for the UK government to press ahead with plans for HS2, the high-speed rail network.
Construction companies like Morgan Sindall could do very nicely if the project goes ahead, however, HS2 is just a hint of the full opportunity.
Prime Minister Boris Johnson has often argued that with the government able to borrow at near record low interest rates, now is a good time to invest in infrastructure.
Even Ken Rogoff, co-author of This Time it is Different (a book often cited by austerity advocates for its empirical evidence in support of keeping a firm lid on public debt), has argued that the government should spend on infrastructure with rates as they are. The UK government can borrow at just 0.88% per annum over 10 years.
I think that many construction companies could be big beneficiaries if this infrastructure spend does happen.
Morgan Sindall looks good anyway
As for Morgan Sindall, I think the company’s shares look tempting anyway. Add the opportunity presented by infrastructure spending, and they become hard to resist, especially for investors looking for an income stream that can grow over time.
Revenue at Morgan Sindall has increased every year over the last half decade. In 2019, revenue was up 3% to £3.1bn compared to the year before, and adjusted profits before tax increased 11% to £90.4m.
The balance sheet looks strong. Current assets are just a fraction less than total liabilities, while net assets are a healthy £397m and have been rising steadily for years – at the end of 2015, net assets were worth £249m.
The company is also a good dividend payer. At the current share price, the dividend yield is just over 3%. Sure, there are higher yields than that available elsewhere, but consider the Morgan Sindall dividend in the context of its share price performance. Shares have increased 2.6-fold over the last five years. That means an investor who bought shares in the company five years ago would now be enjoying a yield worth 7.8% of the initial investment.
The story of the Morgan Sindall share price makes a pleasant read. Shares have increased 63% over the last six months. Since 1998, when the company was first listed on the stock market, shares have increased 11-fold.
The company’s financial track record, strong balance sheet, and dividend history is impressive. I gather that within the construction industry itself, it has a good reputation. Combine all this with the opportunity that comes with possible government infrastructure spending, and I think this company should appeal to investors looking for income growth.
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Michael Baxter 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.