- Life protection and hazard detection specialist hikes annual dividend yet again
- Upbeat guidance for sales and profit margins for the new financial year
- Shares are bearing down on 2021’s all-time high
“There is a school of investors that loves to buy companies with a strong franchise and a competitive position that drives sales and provides the sort of pricing power which supports, in turn, profit margins, cash flow and dividends. Halma is just their sort of company,” says AJ Bell Investment Director Russ Mould. “A forty-sixth consecutive increase in its annual dividend of at least 5% shows that the FTSE 100 index member is doing something right, especially as earnings cover for the dividend is not looking thin by any means thanks to good profits growth, and management’s outlook statement for the year to 2026 suggests further progress is on the way.
Source: Company accounts
“Chief executive Marc Ronchetti’s outlook statement flags a year-on-year increase in orders and sales in the early stages of the new financial year, with the result that he expects a high single-digit percentage increase in revenues on an underlying basis for the coming twelve months.
“Analysts had pencilled in 6% sales growth for this year on a stated basis. Add that to Mr Ronchetti’s view that the underlying operating margin will come in above the mid-point of the company’s target range of 19% to 23%, after last year’s 21.6%, and analysts may be nudging up their profit forecasts.
“That underpins the board’s decision to increase the annual dividend for the year to March 2025 by 7% to 23.12p and consensus analysts’ forecasts of a further advance to 25p a share in the coming year to March 2026.
“Halma is still making an operating return on sales of more than 21%, a double-digit return on invested capital (ROIC) and generating plenty of free cash flow. In addition, net debt is low at £536 million given the cash flow and shareholders’ funds of £1.9 billion.
“Earnings cover for the dividend payment is above three times, even on a statutory basis, and thus well above the traditional comfort zone of two times.
Source: Company accounts
“Better still, free cash flow cover continues to rise. Halma can therefore afford to maintain its dividend growth streak, so long as management feels it is prudent to do so and it does not have a more pressing use for the cash elsewhere.
Source: Company accounts
“Although the actual forecast dividend yield of 0.8% is not going to set income investors’ pulses racing, the consistent increases in the total annual pay-out are helping to carry the share price higher. Halma’s share price was 1.9p at the start of 1979, when the dividend growth streak began, so this year’s forecast distribution of 25p a share looks pretty good against that.
“While this might seem like an extreme example, it does show how well-run, well-financed companies which build and hone their competitive position can reward truly patient investors, with the ideal combination of capital gains and income. Halma has been able to do this because management continues to get the fundamental basics right:
- The company continues to think on a long-term basis, with careful investment in new products and services and prudent capital allocation. Investment in organic growth comes first, select acquisitions second and capital returns to shareholders next, which is the correct way around. If the first two are done well, then the third can almost take care of itself.
- There are strong regulatory drivers associated with Halma’s hazard detection and life protection products and the company’s ongoing investment means it continues to maintain and develop the competitive position of its core business. Both facets are reflected in the high-teens percentage operating margin and the robust cash flow, which both funds the dividends and keeps debt reassuringly low.
- Management continues to use select, small acquisitions to supplement existing momentum within the business, not create or transform it with one knock-out, potentially high-risk deal.
“One challenge that shareholders do face now is Halma’s valuation. A forward price/earnings ratio of some 36 times prices in an enormous amount of good news, even allowing for the company’s long-term track record.
“The one danger is therefore that investors mistake the reliability of Halma’s business model for safety, in that the higher the valuation goes, the less safe the shares may be, at least in the short term, especially in the event of any unexpected, wider market convulsion.
“Long-term investors are unlikely to be moved by such considerations and will no doubt ride out any cyclical eddies and whirls in the view that Halma’s business model, strong cash flow and robust finances will enable the company to add to its long-term dividend growth streak which, by dint of mathematics, could keep dragging the shares higher if it does indeed continue.”
