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This FTSE 100 company has suspended dividends. Here’s why I’m still buying it

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I’m talking about the FTSE 100 pest control and hygiene services company Rentokil Initial (LSE: RTO). It suspended dividend payments earlier this week, including the final dividend for the year. I don’t think investors should be fazed by this. The reason’s simple – RTO was never a dividend stock to start with. 

Not a dividend stock

Even earlier, Rentokil’s total dividend level was 5.15p per share. At yesterday’s closing share price, this translates to a low 1.3% yield. To put that in context, the FTSE 100 as a whole has a dividend yield of 7% at present. With much better FTSE 100 dividend stocks available, I’m not perturbed by the actual cut in RTO’s dividends. Rather, I’m interested in the why of the story. 

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There are various reasons companies may cut dividends, not all of which are bad. For instance, it could want to plough money back into capital spending, which might be beneficial for long-term investors. But the timing of this particular cut suggests that all may not be well at Rentokil. So I dug into the details to get a better understanding of what’s really going on for this otherwise attractive share. 

Proactive measures

The answer’s obvious: Covid-19. In its trading update, RTO says that its operations have been hit, as was to be expected. Concrete numbers on how much business it’s losing aren’t available yet, but it’s already on a cost-cutting and cash conservation drive. I think these are proactive steps, which give me greater confidence in management. 

Resilient demand

This adds to the company’s positives. In any case, RTO’s share price chart shows that it’s close to being the perfect dream of a long-term growth investor. The company’s share price has risen steadily over time, with a few bumps, making it a good growth stock. Buying shares of companies providing products and services with relatively resilient demand can be a good idea even in a weak economy. This is because their revenue stream is unlikely to be impacted. 

Positive future for this FTSE 100 stock

Besides this, the expected business pickup after the crisis is over could be beneficial for Rentokil Initial. In its own words “When the crisis ends we envisage that there will be a significant demand for hygiene and pest control clean up services”. I’d  expect the combination of steps undertaken to manage its finances along with a bump up in revenues in the future will make RTO one of the companies that are unscathed by the economic plunge. 

Its share price saw an over 8% fall on the day the trading update was released, but it’s already risen sharply from there. However, at the last close at time of writing, it was still 24% below the highest level of 525.4p seen in 2020 so far. I believe its price is poised to rise further, making the current time a good buying opportunity. 

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Manika Premsingh 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.

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