Quality… but at a price

Belfast-based IT solutions provider Kainos (LSE: KNOS) is down to report interim numbers on 15 November. Having more than doubled adjusted pre-tax profit to £57.1m in the previous financial year, it’s not unreasonable to think that the good times have continued. After all, the need for organisations to digitally transform their operations has never been greater.

This could be good news for the KNOS share price which has already climbed 61% in the last 12 months. I say ‘could’ because this really depends on whether the company is able to meet investors’ (lofty) expectations.

Kainos ticks many of my ‘quality growth’ boxes. High margins? Check. Strong returns on invested capital? Check. Low/no debt? Check.

The problem is that all this comes with an exceptionally high price tag of 53 times forecast earnings. So the risk here is that any slight misstep or loss of trading momentum might be poorly received by the market.

As things stand, that’s not an ideal risk/reward trade-off. Hence, I’ll be watching next month’s activity with interest.

Ticking time bomb?

I’ll also be following FTSE 250 member Watches of Switzerland (LSE: WOSG). Like Kainos, investors in the luxury timepiece retailer have enjoyed a brilliant run of late. Its stock is up a little over 180% since the end of October 2020.

Based on its Q1 update, I think there’s a chance this momentum will carry on when H1 results are revealed on 9 November. Back in August, the company said trading in the UK has been “exceptionally strong” and that the US business was seeing “excellent, broad-based growth”. Group revenue hit £297.5m — more than double that achieved over the same period last year.

WOSG shares currently trade at 33 times earnings. While still pricey, that’s far more palatable than its FTSE 250 peer’s valuation. Then again, operating margins in this line of work aren’t exactly massive (9% last year). It makes you wonder what might happen to investor sentiment if consumers begin to tighten their belts again as lockdown savings run out. 

Could this growth stock actually be a ticking time bomb? We’ll soon find out. 

Contrarian pick

Also on my watchlist is respirator and ballistics expert Avon Protection (LSE: AVON). Of the companies mentioned here, this is the one I’d be most likely to buy next month.

Labelling Avon as a ‘great’ growth stock may seem odd. The shares have plunged in value recently following news of order delays, supply chain disruption and a “tight labour market“.

To me, these issues are temporary. Even so, external forces could impede Avon for a while yet. As a result, I don’t expect a quick rebound when full-year results are revealed on 23 November. That’s despite the company saying it possessed a “strong order book” earlier this month.

Still, shares trade at under 20 times forecast FY22 earnings. This looks reasonable for a leader in a niche market with significant barriers to entry. Contrarians are also being compensated with dividends, although the yield is just 1.7%.

Taking into account this margin of safety, I’ll be hovering over the ‘buy’ button next month. 

The post Earnings season is coming! 3 great growth stocks I’ll be watching in November appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Avon Protection and Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Subdued market

Today’s statement started well enough. Having made the most of the last financial year, CMC said that client assets under management (AuM) continued to hit “near-record levels“. The number of active clients had also remained fairly consistent over the five months to the end of August and was up “around a third” from before the whole coronavirus crisis kicked off.  

However, it was at this point that the tone shifted. According to CMC, “subdued” market activity during July and August has meant lower trading by new and existing clients. Having attracted so many people to its platform over the last year or so, CMC also reported that client income retention has been “moderately below” its 80% target.

If the recent lack of activity continues, it believes net operating income for FY22 will now come in somewhere between £250m and £280m.  

Clearly, news like this (as well as an indication that operating costs were increasing) was never going to be greeted enthusiastically by the company’s investors. But is a 25% fall truly justified? 

Has the CMC Markets share price fallen too far?

Personally, I think the fall is overdone. Having benefited so much from the incredible volatility seen in markets last year, there was always going to come a time when trading moderated. Let’s not forget that, before today, the CMC Markets share price had increased 35% in just 12 months. Nothing rises in a straight line. 

There’s also a lot still to like about this company, at least in my view. It appears to have a sound strategy for growth and an incredibly robust balance sheet. The returns on capital metric beloved of UK star fund manager Terry Smith has been high for many years. A potential 16.9p per share dividend also has this stock yielding a chunky 5.5% at its new, much lower price. Now, no income stream can be guaranteed. Even so, this does strike me as adequate compensation for what could be rough times ahead.  

On the downside, the small ‘free float’ means the share price is potentially far more volatile than that of other stocks. Today would appear to be clear evidence of that! Second, the threat of increased regulation in this industry can never be discounted. Third, there’s no shortage of competition for clients. 

Letting it settle

I’d need to be very careful before adding CMC Markets to my portfolio. After all, I already own shares in the market leader IG Group. Having too much exposure to one industry invites trouble. It can be wonderful during the good times but a potential nightmare during the bad.

That said, if I didn’t own IGG, I’d be tempted to get involved with CMC at some point. This FTSE 250 member presents as a quality operator, albeit one that has become a victim of the sudden swing in Mr Market’s mood.  

Quite where the share price goes in the near term, however, is anyone’s guess. In recent weeks, we’ve seen several previously-loved stocks tumble and continue tumbling. Avon Protection and Best of the Best spring to mind.

If I did cave in and buy, I’d wait for the dust to settle first.

The post Here’s why the CMC Markets share price (CMCX) has crashed 25% today appeared first on The Twelfth Magpie.

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Paul Summers owns shares in IG Group. The Motley Fool UK has recommended Avon Protection. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Doubling my ISA: what will it take?

To double the value of my portfolio, I need to achieve an annualised return of around 15%. In other words, I need my capital to grow 15% in 2021, another 15% in 2022, and so on. This is how things would look if I used the nominal sum of £1,000.

Compound interest really is a wonderful thing. And this doesn’t include the impact of any reinvested dividends!

So, how do I hit this target?

Clearly, being invested in the best stocks helps. But what makes a company better than others? Everyone will have an idea about this.

A ‘meme stock’ investor would say that AMC Entertainment and GameStop would qualify. I respectfully disagree. Their share prices have certainly ‘popped’ in 2021 but have since flagged. They’re best left to traders, in my opinion. 

Personally, I don’t think I need to take on such risk to get a 15% annualised return. For me, the best ISA stocks are those that are leaders in niche markets, boast fantastic brands, have strong growth potential, and/or generate great returns on the money they invest. I think I have several in my portfolio already. These include kettle appliance maker Strix, equipment manufacturer Somero Enterprises, and online behemoth Boohoo. 

But let’s take a step back here. The fact that something is achievable does not mean it will happen, of course. Let’s briefly look at what things could stop me from achieving my goal.

What could go wrong

Unfortunately, there’s no guarantee my ISA stocks will perform. Last week alone showed just how unforgiving other investors can be with the share prices of Best of the Best and Avon Protection being pummelled. Both have previously scored highly on the things I usually look for.

Even if the companies I own do very well, they could still be held back by general market jitters. These days, investors are getting increasingly worried about rising inflation, for example. And even if this does prove ‘transitory’, there will always be another potential setback waiting in the wings to knock confidence. 

How I can improve my chances

Aside from hoping my stock-picking is on form, there are four other things I think I can do. 

1) Keep investing. This includes periods in which markets head south. It sounds simple but it’s harder to do in practice.

2) Go small. Smaller companies have the ability to grow at rates larger companies simply can’t. This can often lead to a huge uplift in share prices. 

2) Use up my ISA allowance. As well as continuing to invest, it would also be a good idea to use my £20,000 ISA allowance in full. The more money I put to work, the greater the potential impact of compounding.

3) Avoid frothy markets. A final, debatable point is that it might make sense to avoid markets (and companies) where valuations are looking stretched. Having more than doubled over the last year, the US market looks a little too hot to me right now. 

The post How I plan to double my Stocks and Shares ISA in 5 years appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Strix, Somero Enterprises and boohoo group. The Motley Fool UK has recommended Avon Protection, Somero Enterprises, Inc., and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

AVON share price: what gives?

Today’s trading update from the self-styled “innovative technology group” certainly started well. The company said it had seen “good commercial progress” in the second half of its financial year. Indeed, order intake hit $221m in the 10 months to the end of July. This was an increase of 13% on that achieved over the same period in 2019/20. 

Opportunity… or warning?

For a company that makes products designed to provide safety for those wearing them, Avon Protection was offering little comfort to its investors this morning. However, I wonder if today’s crash to the share price provides long-term growth investors like me with an opportunity.

Let’s run through some potential chinks of light. While we don’t know for sure how long these issues will last (and the market hates uncertainty), Avon Protection does expect recent disruption to be temporary. Margins will recover and the unexpected build-up of inventory will go out to customers eventually.

I fully expect the issues surrounding product approvals at its Military Ballistic business to be resolved as well. Investors have known about these for some time now. It was these that put the AVON share price in reverse since last December. Naturally, ongoing concerns relating to new variants of Covid-19 haven’t boosted sentiment around the stock.

Aside from all this, the FTSE 250 constituent is still a leader in a niche market producing essential equipment. I think this sets it apart from another heavy faller today. In fact, I wonder if today’s dip might attract the attention of potential suitors. After all, we’re seeing a lot of consolidation in the defence sector right now. 

A tempting buy

Far from scaring me, today’s fall is actually tempting me to get involved again. Even so, I wouldn’t necessarily go ‘all in’ at this level. Since there’s still potential for things to get worse before they improve, I suspect it would be better for me to take a starter position today. After all, there’s always a chance guidance will be lowered again.

I need the outlook to become a little less foggy before thoroughly committing myself.

The post The AVON share price just tanked 25%! Here’s what I’m doing about it appeared first on The Twelfth Magpie.

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Paul Summers has no position in Avon Protection. The Motley Fool UK has recommended Avon Protection. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

AG Barr

In contrast to other consumer goods stocks, the share price of drinks firm AG Barr (LSE: BAG) is still to see some serious positive momentum. Nevertheless, today’s trading statement does hint that the recovery is getting closer.

This morning, Barr said that trading has been in line with management expectations. That’s comforting considering the UK was in lockdown for the early part of 2021.

As investors might expect, the easing of restrictions and re-opening of hospitality and leisure venues have provided a much-needed boost to sales. This is particularly the case for its Funkin ready-to-drink cocktails business (although people still seem to be consuming these at home). Elsewhere, the launch of new products, such as Rubicon RAW Energy, have been well-received by consumers. 

There were also encouraging noises on dividends. Now, income isn’t a priority for growth investors like me (I simply re-invest what I receive). However, I do use it as a gauge for just how confident management is on future trading. Today, Barr announced it remained committed to restoring cash returns in the current financial year. More news is expected in August.

A forecast price-to-earnings ratio of 22 isn’t initially appealing, especially given the risk of coronavirus infections climbing again. Naturally, any change to Boris Johnson’s roadmap back to normality would not go down well with the market.

Nevertheless, it’s worth highlighting that BAG is still 45% off the valuation it hit almost exactly two years ago. It’ll take a while, but I firmly believe the Irn-Bru owner will fizz in time.

Avon Rubber

A second growth stock that’s still far off previous highs is life-critical personal protection firm Avon Rubber (LSE: AVON). Thanks to the strangely muted reaction to this week’s encouraging interim results, I think there’s still time for investors like me to get involved in this quality company.

According to CEO Paul McDonald, the firm has made a “strong start” to the year. The numbers bear this out. Revenue and adjusted pre-tax profit climbed 41% (to $122m) and 23% (to $16m) respectively over the six months to the end of March. In other news, net debt pretty much halved to just over $44m. The interim dividend was also hiked by 30%.

Perhaps most importantly for would-be investors, Avon said that it was making “good progress” with regard to sorting out the delays in gaining product approval for its body armour programmes. This is partly what caused the shares to dive late last year. 

Thanks to a 46.5% jump in orders, the mid-cap — which will shortly change its name to Avon Protection — thinks it will deliver full-year numbers as expected. Revenue visibility going forward has also been described as “excellent“. That’s more than you can say for other growth stocks. 

Avon is still 35% below the share price high it hit back in December. Again, like AG Barr, I’m not expecting this gap to close overnight. However, I do think those with time on their hands will be rewarded eventually.

The post 2 beaten-down UK growth stocks to buy right now appeared first on The Twelfth Magpie.

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Paul Summers owns shares of AG Barr. The Motley Fool UK has recommended AG Barr and Avon Rubber. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But lately, this incredible growth seems to have reversed. Since December 2020, Avon Rubber’s share price has fallen almost 40%. What’s going on? And is this a buying opportunity for my growth portfolio? Let’s take a look.

A military specialist

If you are not familiar with the business, Avon Rubber is a designer and manufacturer of personal protection equipment. Its products are predominantly used in the military and first response units such as the police and firefighters.

The business has two main units. The first and larger one creates respiratory products such as gas masks, underwater breathing units, and low profile escape hoods. Recently the firm partnered with University College London and adapted its technology to create a new patient breathing interface for ventilators used to treat severe cases of Covid-19.

Its second and relatively newer unit specialises in ballistic protection gear, such as ceramic body armour and helmets.

Combined, these products have enabled the business to become a key supplier of military-grade protective gear for the US armed forces. All the while, cementing numerous long-term contracts that have led to explosive growth for investors.

So why did the Avon Rubber share price fall?

As I just said, a core component of its rising share price is the large contracts with the DoD. So a sudden drop is not at all too surprising when the firm failed to deliver an order on time.

The company was due to supply body armour plates for the US military. However, because of an unpredicted prolonged approval process, Avon has been unable to deliver the promised products. The management currently expects the order won’t be completed until early 2022.

Needless to say, this is not good news. And it has undoubtedly impacted the stock’s reputation for reliability. However, the extent of the reputational damage appears to remain relatively limited. The stock continues to receive large scale orders. Most recently, a $33m contract to provide its respiratory devices for NATO was signed.

There are some investment risks to consider

The world of personal protection equipment is constantly evolving. Numerous competitors are targeting the same contracts which Avon currently holds. Suppose the business is unable to identify new and improved products to protect the safety of its users. In that case, competitors might be able to swoop in a take over existing contracts in the future.

The same risk applies if Avon Rubber once again fails to complete orders on time. While the most recent incident appears to be a one-off event, it may happen again in the future. If delivery dates continue to be missed, the firm’s reliability will likely come into question, resulting in future revenue loss. At least that’s what I think.

Is the Avon Rubber share price a bargain?

Even after this large drop, the Avon Rubber share price is by no means cheap. But that is often the case with high growth stocks. Personally, the valuation is still a bit too rich for my tastes.

However, the business looks incredibly strong to me, so I may be tempted to add it to my growth portfolio if its share price continues to fall.

The post The Avon Rubber share price has fallen 40% in 3 months. Should I buy now? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in Avon Rubber. The Motley Fool UK has recommended Avon Rubber. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The latest bid is for gaming developer Codemasters. It has received an offer from US titan Electronic Arts. If accepted, holders will receive 604p per share. That’s a big improvement on the 485p recently offered by rival Take-Two. The fact that Codemasters’ price is already at 654p, however, suggests a counter-bid may be forthcoming!

This has made me wonder which UK shares might be next to receive bids. Here are three that spring to mind. But I’d never buy a share just in the hope of its being bought. These are all shares I think have strong appeal even without a takeover boost.

Frontier Developments

Sticking with gaming, Cambridge-based Frontier Developments (LSE: FDEV) could also be on larger players’ shopping lists. It’s the brains behind titles including Planet Zoo and Jurassic World: Evolution. 

But Frontier wouldn’t be sold for peanuts. Thanks to the popularity of gaming during lockdowns, the shares have soared 155% year-to-date. This gives the company a valuation of £1.2bn!

If the battle for Codemasters tells us anything, however, it’s that overseas gaming giants will pay up to steal a march on competitors. Perhaps Chinese internet giant Tencent may wish to make a bid. It does already own almost 9% of Frontier. 

Regardless of whether this happens, I wouldn’t be surprised if there’s further consolidation in the gaming industry in 2021. With eSports looking set to be one of the investing themes of the next decade, it’s surely only a matter of time before other UK shares get taken out. 

Avon Rubber

Another firm that could find itself an opportunistic bid target before long is body-armour builder Avon Rubber (LSE: AVON). It’s a lot cheaper now than it was at the beginning of last week.

As fellow Fool Royston Wild covered in detail, Avon’s share price tumbled by 14% last Thursday on news that product approval relating to two contracts had been delayed. A protest had also been made relating to another contract. 

As a one-time holder of the stock, I’d be sorry to see a firm like Avon acquired by an overseas bidder. Nevertheless, I can see the appeal. Here’s a high-quality firm in a niche market with bulletproof finances.

Regardless of takeover speculation on my part, I may need to seriously consider welcoming Avon back to my portfolio if it drops much further. The share price fell another 7% on Friday and now trades at just two-thirds of the valuation it had at the beginning of December.

ITV

No takeover talk is complete without mentioning FTSE 250 member ITV (LSE: ITV). The Love Island producer has had a target on its back since Sky was bought in 2018.

The attractions of ITV aren’t hard to fathom. In addition to its various channels, the broadcaster has its very successful Studios division. It’s also entered the streaming market with its BritBox offering as part of its digital transformation.

If a potential suitor wants a cracking deal, they need to show their hand soon. Should advertising revenue pick up in 2021 with dividends reinstated, ITV could be on its way back to the FTSE 100. The shares are already up 50% since early November!

If a deal happens, my money’s on telecoms company Liberty Global. It owns 10% of ITV already.

The post Takeover targets? I think these could be the best UK shares to buy now! appeared first on The Twelfth Magpie.

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Paul Summers owns shares of ITV. The Motley Fool UK has recommended Avon Rubber, Frontier Developments, and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

On a roll

At a time when most investors are scrambling for cover as companies begin reporting on trading over the coronavirus pandemic, the latest news from Avon really stands out. Revenue hit £94.7m in the six-month period. This was a rise of 28.7% on that achieved over the same period last year.   Roughly two-thirds of this growth came from the company’s acquisition of US conglomerate 3M’s ballistic protection business (Helmets and Armour) in January. Interestingly, this deal was part of the reason Terry Smith decided to jettison the latter from the highly successful Fundsmith Equity fund late last year.

Elsewhere, decent market conditions also led to a strong revenue performance from the company’s milkrite/InterPuls business. On top of all this, the FTSE 250 stock has inked two big body armour contracts with the US Department of Defence over the period. Adjusted pre-tax profit came in a superb 67% higher at £14.7m.  Given the above, it’s perhaps no surprise the interim dividend has been raised. Even so, a 30% increase to just over 9p per share reflects just how confident management is on the company’s progress. 

Naturally, Avon’s quality is reflected in its valuation. A price-to-earnings (P/E) ratio of 30 for the current financial year means new investors will need to dig deep.

Nevertheless, the bullish tone of today’s statement and robust balance sheet mean I’ve no intention of selling my stake just yet.  

Another rising FTSE 250 star

Another FTSE 250 stock also experiencing great trading at the moment is Computacenter (LSE: CCC). A company perhaps unfamiliar to many private investors, the business provides IT infrastructure services to firms. Like Avon, recent updates from the company have been very positive. 

Having already informed investors that trading over the coronavirus pandemic had been better than expected, the £1.8bn-cap announced it had also secured “some substantial Technology Sourcing contracts” in recent weeks. As a result, Computacenter believes the first half of its financial year will now be “considerably ahead of the same period of last year.” 

This surely bodes well for the share price. Despite bouncing hard recently, the FTSE 250 stock still trades 17% below the all-time highs it hit in February. 

The valuation isn’t excessive either. Right now, Computacenter can be yours for 18 times forecast earnings. That looks a good deal to me. There’s net cash on the balance sheet. It also makes consistently great returns on the money it invests in the business.

If you can look past the company being “unable to provide meaningful guidance” on business over H2, I think Computacenter could be a great long-term buy for growth-focused investors.

The post This FTSE 250 growth stock just hit an all-time high. Here’s why I’m not selling yet appeared first on The Twelfth Magpie.

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Paul Summers owns shares of Avon Rubber. The Motley Fool UK has recommended Avon Rubber. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 250 business, which builds protective masks for security services, the military and police forces, is building a head of steam right now. It’s announced a raft of multi-year contract wins with the US Department of Defense (DoD) since the start of 2019, deals worth an aggregated maximum of $350m and which will be profits-enhancing from the second half of this year.

Avon may be experiencing sales problems at its Milkrite and InterPuls divisions, operations which produce milking apparatus for the farming industry, but progress at its Protection division is offsetting this. And there’s plenty of reasons to expect those upcoming six-month trading details to impress on this front again.

As well as advising it was making “good progress” with regards to exploring military sales opportunities with the DoD and other global customers, in January Avon boasted of a “strong pipeline” of opportunities in the law enforcement and firefighting arenas. It added sales to these sectors in particular should pick up in the second half following the order disruption it had experienced due to the US government shutdown over the winter.

Don’t have a cow, man

Investor demand has boomed in recent weeks in expectation of a strong May release, with Avon’s share price rising 13% since the same point in March. And I reckon there’s scope for extra gains following next month’s update, and not just because of the excellent progress Avon is making with its protection products.

In January, the FTSE 250 firm bemoaned the softness in the dairy industry in the first quarter, with weak milk prices denting farmer confidence and thus demand for high-tech milking products. What’s more, it warned that higher feed prices in the three months to May would make conditions even tougher.

However, signs are beginning to emerge which suggests that the softness in the dairy market could be moderating. Data this week from the USDA showed milk production in March dropped 0.4%, reflecting the recent descent in milk cow numbers on American farms, and cutting output growth for the first quarter to just 0.2%.

Dividend dynamo

With herds thinning, we could be on the verge of seeing a pick up in milk prices and a subsequent recovery in demand for Avon’s agricultural tech. It’s quite possible that, in combination with that sprightly sales momentum over at Protection, we could see earnings forecasts for this year and next upgraded (City analysts are currently expecting a 2% profits fall in the year to September 2019 and a 4% rise in fiscal 2020). And this could see dividend estimates receive a shot in the arm too.

That’s not to say that the company’s dividend outlook is anything like shoddy. The defence giant has lifted payouts at a rate of knots over the past half a decade and the number crunchers are expecting more healthy growth in the medium term, to 20.8p per share this year from 16.02p last year, and to 27.1p next year.

Bigger yields can be found than Avon’s 1.5% and 1.9% for this year and next, respectively, but for those seeking strong and sustained dividend growth in the years ahead, I believe it’s a great share to snap up today.

The post Dividend alert! I’m expecting this FTSE 250 dividend hero’s share price to keep surging appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Avon Rubber. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

That said, there’s also something about paying more (but not too much) for quality companies that don’t require constant monitoring and just letting them get on with things. 

I’d put Vimto-maker Nichols (LSE: NICL) firmly in the latter category, alongside industry peers AG Barr and Britvic. Don’t get me started on Fevertree. 

Reassuringly expensive

Today’s results for 2018 from the mid-cap were further evidence of just how reliable the company is. Revenue was up 7% to £142m and pre-tax profit, before exceptional items, rose 4% to £31.8m.

Commenting on results, non-executive chairman John Nichols said the company’s performance in the UK — where total sales increased 12.7% to £114.6m — had been “driven by the strength of the Vimto brand” which was “continuing to outperform the wider soft drinks market.” Helping to justify recent investment in this part of the company, sales from Nichol’s Out of Home channel also increased by 15.2%.

Performance overseas was more mixed with progress in Africa offset by weaker sales in the Middle East, as a result of the ongoing conflict in Yemen and issues over shipments to Saudi Arabia. All told, international sales were almost 12% lower (£27.4m) than in 2017. A temporary blip, I think.

Looking ahead, there’s little to make me think that Nichols will encounter any serious difficulties in the rest of 2019 (although the aforementioned conflict will need to be monitored). It’s debt free, has loads of cash, a portfolio of excellent brands, generates high margins and returns on capital and, considering our forthcoming exit from the EU, isn’t completely reliant on the UK market for its success. 

Aside from the above, there’s also the fact that Nichols consistently hikes its cash returns to shareholders. Today’s 14.5% increase to the final dividend (26.8p) brings the total for the last financial year to 38.1p — up 13.7% and representing a trailing yield of 2.4% based on the share price at the time of writing. That may look average but, as mentioned here, regular hikes to small dividends are often better than large but stagnant returns. 

Changing hands for 21 times forecast 2019 earnings before this morning, Nichols is one of those companies that very rarely goes on sale. Those who already hold should continue doing so, in my opinion.

Dividend hiker

Another share that could be worth paying up for is gas mask supplier and milking point solutions provider Avon Rubber (LSE: AVON).

The small-cap’s shares possess many of the attributes boasted by Nichols, including a bulletproof balance sheet (no debt and £46.5m in cash at the end of the last financial year), high returns on capital, and regular double-digit hikes to the annual dividend.

The firm recently reported that its Protection arm had “enjoyed a solid start to the year” after securing a new contract from the US Department of Defense. The first order relating to this — 7,000 mask systems worth $17.8m — has now arrived. As a result (and despite “tougher dairy market conditions” impacting on its milkrite/InterPuls business), Avon’s management remains confident of achieving its expectations for the full year.

At almost 17 times forecast earnings, this stock isn’t screamingly cheap, but is still very reasonable considering the company’s solid track record.  

The post 2 high-quality dividend-hikers I’d buy and hold for the long term appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Nichols. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.