AJ Bell press comment – 3 October 2022
- Dividend growth for the flooring specialist at 1.6% for the full year
- Analysts currently expect operating margin to stay at second half’s 17.1% across new financial year to June 2023
- Pricing power underpins high-teens operating margin and therefore the cash flow funding dividend growth streak
“Very few things can be relied upon in an uncertain world but an increase in the annual dividend from flooring specialist James Halstead is one of them,” says AJ Bell investment director Russ Mould. “The AIM-quoted company has delivered again for the financial year that ended in June, but the flat second-half payment means the increase for the full year is just 1.6%, the slowest rate of growth since James Halstead's phenomenal growth streak in its ordinary dividend began 45 years ago.”
Source: Company accounts. Financial year to June.
“Add that to the drop in operating margin and a planned increase in inventories to ensure supply for customers and it is clear that management is having to confront many challenges at once. Analysts currently expect the operating margin to stay at the second half’s 17.1% level across the new financial year to June 2023.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to June.
“This seems prudent for now, given how James Halstead may, at some stage, need to slow output and accept lower capacity utilisation rates in its Bury and Teesside factories, if it is to run down some of the £112 million it now holds in inventory on its balance sheet. That figure represents some 230 days of inventory, to show how carefully management is taking care of supply to ensure customers are not disappointed at a time when supply chains are stretched, way higher than anything seen in the last 25 years.
Source: Company accounts. Financial year to June.
“The good news is that James Halstead is well-resourced.
“The balance sheet shows £52 million of cash and no debt and lease obligations of £5.6 million, with a pension surplus on top, despite a £50 million investment in increased stock, £3 million of capital spending and £32 million of dividend payments. Such robust finances should see James Halstead through any economic squall and the failure of one its global rivals should only strengthen its position in the marketplace and that in turn should boost its ability to set, and get, the prices it wants to receive rather than be forced to accept the prices its customers are willing to pay.
“Pricing power underpins the company’s high-teens operating margin and therefore the cash flow that funds the dividend growth streak.
Source: Company accounts.
“The total dividend of 7.75p for the year to June 2022 equates to a dividend yield of 3.8%. This may no long beat inflation, or even match the yield on the ten-year Government Gilt (which is a wider issue for the UK equity market) but the secret to the investment case for James Halstead has, thus far, been dividend growth.
“The share price was 0.145p when the dividend growth streak began in 1977, so a 7.75p-a-year dividend payment on that in price looks truly amazing now.”
