Clean Up With This Steady 4.6% Dividend

Published in Company Comment on 2 May 2012

A solid business protected from overseas competition.

If you're looking for a business that doesn't rely upon high technology, won't have to reinvent itself every few years and is well insulated from overseas competition, one company that should be on your radar is the FTSE 250 European textile services specialist Berendsen (LSE: BRSN), which changed its name from Davis Service Group in January 2011.

Berendsen provides services to a wide variety of businesses that prefer to outsource their laundry, uniform provision and washroom maintenance to someone else. It has increase its dividend by just over 5% per annum in the last five years and, at the current price of 510p, its shares sit on a relatively modest prospective price-to-earnings (P/E) ratio of 10.1 where they yield 4.6%, which should be of interest to income-seeking investors.

A steady performer

Many investors, me included, prefer to keep a large part of their portfolio in companies that deliver steady yet unspectacular growth in profits and dividends. While the high-flyers on their massive P/E ratios are quite prone to come crashing down to Earth, the less exciting businesses tend to keep on delivering decent results and don't give their shareholders sleepless nights in the process.

Berendsen is one such company. It's never going to set the world on fire, if only because the textile service industry is a mature business, but it's got a fairly good moat that protects its businesses from competition, as it is the biggest player in many of its markets.

Berendsen's largest market is the UK, which accounted for about 38% of its sales last year. 42% is split between Sweden, Germany and Denmark, while the remaining 20% comes from 11 other European countries. I've previously looked at Berendsen's history and its businesses, details of which can be found here.

But watch the accounts

Berendsen provides us with a good example of why investors need to look at the accounts, rather than just relying upon the headline numbers. That's because in the last few years it has been reporting lots of exceptional items due to restructuring programmes and asset sales, so it produces two sets of earnings figures as you can see in its results for 2011, which were published in February.

In 2011, Berendsen's statutory earnings per share (eps) rose by 162% to 33.8p, although this turns out to be less than the companies preferred adjusted eps of 48.4p, which was up by a mere 16%. A major contribution to the massive increase in statutory eps was the total absence of goodwill write-offs in 2011, in contrast to the earlier years, and a substantial drop in restructuring charges. The annual dividend was increased by 10% to 23.4p, the fourth increase in the last five years.

Nothing leaps out from the balance sheet, although investors who like to see plenty of tangible assets might be disappointed as the most recent net asset value is 266p per share. Borrowings will be a little high for some, given that they are just over £605 million compared to £1.39 billion of assets of which almost £420 million is goodwill.

Obviously, Berendsen will be affected by a further downturn in the eurozone, but I suspect that a fair bit of that is already priced into its shares. Shareholders will be hoping that the restructuring and cost-cutting programme is complete so the company can settle down to a period of steady growth.

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> Tony does not own any share mentioned in this article.

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RobinnBanks 04 May 2012 , 3:43pm

Sounds similar to the Initial towel Company, which Rentokil took over, but still went down hill after promising 20% growth for years.

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