Not very often do we see a manufacturing company that outperforms the markets. But so far in 2020, Spirax-Sarco Engineering (LSE: SPX) shares have been on an incredible run, and have gained around 25% since the beginning of the year and about a 45% year-on-year return.
While these figures are impressive, it may seem relatively low considering the share price increase of c.375% over the last five years. Additionally, as Spirax-Sarco Engineering is considered a defensive company with stable revenues that typically are not affected in an economic cycle downturn, I believe it may be one of the best ‘protection’ shares in the market in the case of a stock market crash.
A stable and high growth company
Spirax-Sarco Engineering has enjoyed incredible growth, something that is more typical to high-growth tech stocks and startups. Indeed, it is not as popular as other FTSE 100 stocks and is less attractive in terms of innovation and vision (basically, Spirax-Sarco produces commercial steam systems, electric thermal solutions, pumps, and fluid path equipment). But at the same time, Spirax-Sarco’s growth was slightly different as its shares have been quietly blasting off to record-high territory and doing so without a lot of attention. That is a good sign and may indicate the future strength of a company.
Ultimately, I believe Spirax-Sarco is a high-quality stock, with a stable revenue flow. It is normally not subject to seasonal fluctuations, nor economic downturns. In the first half-year of 2020, Spirax-Sarco’s revenue was down only 4% to £569.7m, while earnings per share increased by 2% to 104.2p. The decrease in revenue was largely driven by the Steam Specialties division, which was down by 9%, while the company’s other segments – Electric Thermal solutions and Watson-Marlow Fluid Technology Group – reported a revenue increase of 7% and 5% respectively. Net debt has decreased to £326m from £391m from the previous year, while the company has managed to increase its free cash flow from £165m to £189m.
As a result of the above, Spirax-Sarco Engineering shares have performed very well despite the mini-crisis and the financial turmoil.
What about dividends?
Considering the exponential growth of Spirax-Sarco Engineering, a dividend yield of 5% would be a great bonus. Spirax-Sarco confirmed in the latest quarterly report a cash dividend of 33.5p per share, an increase of 5% from the previous year. In respect of 2019, Spirax-Sarco paid £57.5m to shareholders in dividends.
The good news is that the company’s balance sheet and statements of cash flow may indicate it would continue paying dividends on an annual basis.
Spirax-Sarco Engineering shares have seen a healthy price increase over the past five years. In fact, it is now trading at an all-time-high. And, even though I think a correction is likely to happen soon, it’s very difficult to see Spirax-Sarco’’s share price falls drastically in the near future. In my view, this manufacturing company is actually one of the best growth and dividend shares in the UK to buy right now.
As such, I feel Spirax-Sarco Engineering presents a good long-term investment opportunity, whether we are heading for a stock market crash or for a new bull market.
Tom Chen 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.