Can IMI's Rising Dividend Beat the FTSE?
LONDON -- The last few years have been tough for investors relying on the FTSE 100 (INDEX: ^FTSE) to deliver a rising dividend payout.
Looking at the iShares FTSE 100 ETF, an exchange-traded fund that tracks the benchmark index, we can see that the aggregate payment from Britain's top 100 companies has yet to regain its prerecession peak:
Year | 2007 | 2008 | 2009 | 2010 | 2011 |
Dividend per Share (pence) | 19.1 | 20.2 | 17.1 | 16.2 | 18.1 |
But there are companies that have managed to deliver a rising dividend throughout the last five years despite the terrible macroeconomic environment. One such name is IMI (ISE: IMI.L) , one of the FTSE 100's smaller companies.
IMI describes itself as an engineering group focused on the control and movement of fluids in critical applications with a mission to become one of the world's leading engineering companies in its global niche market. With the shares at 795 pence, the market cap is 2.5 billion pounds. This table summarizes IMI's financial record:
Year | 2007 | 2008 | 2009 | 2010 | 2011 |
Sales (millions of pounds) | 1,599 | 1,901 | 1,792 | 1,911 | 2,131 |
Net Cash From Operations (millions of pounds) | 120 | 220 | 236 | 257 | 217 |
Adjusted Earnings per Share (pence) | 41.9 | 54.1 | 45.8 | 66.3 | 81.5 |
Dividend per Share (pence) | 20.2 | 20.7 | 21.2 | 26 | 30 |
The dividend has increased by 48% during the last five years -- equivalent to a 10.4% compound annual growth rate.
IMI operates in around 75 countries, employing about 14,700 people producing valves and liquid-flow-control equipment for industries like energy, transport, beverage dispensing, heating, ventilating, and air conditioning.
Through its two divisions -- fluid controls and retail dispense -- IMI delivers an estimated 70% of its products on a custom-made basis. The company builds engineered solutions according to its blue chip clients' requirements, which generate substantial ongoing aftermarket sales.
I like how IMI evaluates its progress according to its strategic plan. The company aims for niche-market leadership in fluid technologies, where it has pinned down its growth drivers as climate change, resource scarcity, urbanization, and aging populations. When these elements come together, the company sees itself as operating in its "sweet spot." Typically, that means higher margins, higher growth, and greater business resilience.
Just now, the directors reckon more than half of IMI's operations inhabit that sweet spot, and there's a drive to get that percentage higher through careful customer and contract selection and a targeted acquisition policy. With IMI having entered the FTSE 100 for the first time in December 2010, there's evidence that the company's strategy is working.
IMI's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:
Factor | Comment | Score (out of 5) |
|---|---|---|
Dividend cover | Earnings covered last year's dividend more than twice. | 4 |
Net cash/debt | At the last count, there was net gearing of around 18%. | 4 |
Cash flow | Despite rising profits, cash flow has remained relatively flat. | 2 |
Outlook/recent trading | There was an "in line" statement in April. | 4 |
Total: 14/20 |
Overall, I score IMI 14 out of 20, which encourages me to believe that the firm's dividend may continue to outpace dividends from the FTSE 100 if the world economy holds up.
Foolish summary
Although there is a cyclical element to IMI's business, the outlook doesn't seem to have deteriorated, and the company has a good track record of profitable growth. As the cash flow pays the dividend, I'd like to see progress on that in the interim results due in August. If cash flow turns up to follow profits, IMI will probably attract a higher dividend growth score.
Right now, the forecast full-year dividend for IMI is 32.66 pence per share, which supports a possible income of 4.1%. Although that looks attractive, I'd be inclined to keep IMI on my watchlist for now.
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The article Can IMI's Rising Dividend Beat the FTSE? originally appeared on Fool.com.
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