Constructing A Rising Dividend

Published in Company Comment on 21 February 2011

An upwardly mobile dividend from a builder: who'd have thought it!

When a construction company, brim-full of confidence at the peak of last decade's credit-fuelled boom, rebases its dividend upwards by raising it 92% in one go, you could be forgiven for thinking that such a move might have proved unsustainable in recent years.

Well, Kier Group (LSE: KIE) announced just such an increase in September 2007, and its chief executive said:

"In proposing a dividend for this year we have taken into account the comparative compound annual growth rates in dividends and earnings per share over the last ten years and whilst dividends have increased at 15% per annum, earnings per share have increased at 23% per annum, widening the dividend cover over the period."

Ah, well I didn't see the credit-crunch coming either. 

Still standing through the recession

At the time, earnings covered the rebased dividend three times. Since then, in the teeth of the sudden economic gale that followed, Kier dug in, rolled up its sleeves and continued to build and maintain stuff like colleges, schools, court rooms, airports, houses and, believe it or not, the dividend.

In fact, Kier has fared pretty well through the recession with just one hairy set of results in 2009 when profits and cash flow dipped to worrying levels, although both remained positive. 

Since then, its figures have staged something of a recovery as can be seen from the table:

 200520062007200820092010
Revenue (£m)1,6231,8382,1282,3742,1122,056
Net profit (£m)374356481741
Net cash from operations (£m)7791105495115
Diluted earnings per share103p119p153p130p44p107p
Dividend22p26p50p55p55p58p
Dividend cover4.6x4.6x3x2.36x0.8x1.85x

It can be seen that, at the expense of dividend cover, the rebased dividend has continued to grow, and judging by the resurgence of profits and cash flow during 2010, the directors' decision to continue its progressive dividend policy seems to have been vindicated.

Solid foundations

The current figures look quite attractive in my opinion. For example, based on last year's dividend payment, the shares are yielding 4.7% almost twice covered by earnings at the share price of 1,243p as I write. Meanwhile, the trailing price-to earnings ratio is about 11.5 and return on equity is running at a comfortable 39%.

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Furthermore, gearing appears to have been kept under control and is currently running at around 30%. In fact, the balance sheet looks quite strong with a positive net tangible asset foundation of around 163p per share upon which Kier can build growth.

To me, the value is found now in the level of the dividend payment and the strength of the cash flow, which through the return on equity figure, suggests that the company might have the means to continue its progressive dividend policy.

Braced for further challenge

However, there may be further turbulence ahead, and in the latest guidance issued on 12 November, Kier said:

"The current economic environment and the results of the (government's) Comprehensive Spending Review will continue to pose challenges for our industry over the next twelve months."

That may well be the case, but having navigated its way so well through the credit-crunch and recession, my bet is that Kier will come through the year without cutting the dividend.

In fact, the statement also says, under the heading of current trading:

"We are pleased to report that the Group has made a good start to the new financial year with first quarter trading broadly in line with our expectations. Our cash position remains strong and we have healthy order books in Construction and Support Services."

Dividend maintenance

So, here we have an opportunity for investors to lock in a chunky dividend yield from a soundly run company that is very reluctant to lower it, even in the face of challenging economic conditions, and even more likely to raise it as conditions improve, in my opinion.

Of course, I could be wrong and cautious investors might want to wait for further guidance, which is due with the interim results this Thursday. 

In the meantime, I'm taking my hard hat off in recognition of a great effort, when after rebasing the dividend at possibly the worst possible moment, sound business management appears to have saved the day for this cyclical business and the dividend has not yet suffered.

More from Kevin Godbold:

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Comments

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gdb0 22 Feb 2011 , 2:46pm

Agreed, in general terms, Kevin. However, you fail to highlight that two key people in the senior executive management (CEO and FD) have changed recently - the FD very recently, just last November. Now, the new appointees seem to be very sensible and competent people on paper, but the previous long-serving CEO (Dodds) will be an especially difficult act to follow.

Let's hope they have it right and continue the growth/dividend path!

abrahamisaacs 23 Feb 2011 , 3:04am

Construction companies can be risky due to having to service debt and the temptation to capitalise expenses as assets (eg cost over-runs) which can artificially bolster profits and the net asset value simultaneously. I am not saying that has happened here but the departure of CEO and FD would be of concern.

KevinGodbold 24 Feb 2011 , 10:43am

That's a good point gdbo, which complements the article nicely. Thanks for contributing.

Debt seems to be under control at the moment abrahamisaacs.

Thanks for your interest in the article, all.

RobinnBanks 25 Feb 2011 , 1:45am

2% net profit? I'm out!

KevinGodbold 28 Feb 2011 , 12:12pm

Hi RobinnBanks

2% on turnover that includes handling vast quantities of structural steel, bricks and other building materials is different to 2% on the turnover derived from manufacturing or selling something, in my view.

It is still £41m profit. How does that compare to the market capitalisation of the company? How does that ratio sit within the frame of reference for a cyclical company at this stage of the cycle?

To me, it looks attractive.

Best wishes

Kevin

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