Boring but beautiful

Yes, I know — JHD’s line of work will never quicken the pulse in the same way as a blue-sky tech stock might. Then again, I find many of the best long-term investments tend to be those that never make the headlines. Despite shares up roughly 2,000% over the last 20 years, James Halstead has managed to remain a low-key operator.

Today’s interim results show the mid-cap firm is continuing to do all the right things. At £130.5m for the six months to the end of last December, revenue was pretty much identical to that achieved last year. However, it’s worth pointing this level of sales was a record for the company. That’s some feat considering how disruptive the pandemic has been. At £26m, pre-tax profit was 3.3% higher than over the same period in 2019. This was another record result.

As an investment, James Halstead ticks a lot of my boxes. It operates in many markets around the world, serving customers in many industries (retail, hospitality, healthcare). It also generates great returns on capital — a key metric for star fund managers such as Nick Train and Terry Smith. On top of this, JHD has a bulletproof balance sheet and consistently increases its dividends.

All this aside, there are a few drawbacks to investing now. For one, the shares are expensive to acquire, trading as they do on 29 times forecast earnings. While performance over the very long term has been fantastic, some may be put off by the fact that the company is now worth over £1bn. As such, big share price gains are less likely going forward. 

On balance though, I’d be happy to add a stake to my Stocks and Shares ISA today.

Under-the-radar winner

Another quality AIM-listed stock, in my opinion, is Mortgage Advice Bureau (LSE: MAB1). Like James Halstead, the stock has shown itself to be an excellent long-term investment. Since listing in 2014, the share price has climbed over 600%.

Last week’s full-year results for 2020 suggests there’s more to come. Despite gross new mortgage lending falling 9% in the market as a whole, MAB’s revenue rose by 3% to a little over £148m.

Mortgage completions were up by 5% to £17.6bn and the firm grew its market share of new mortgage lending to 6.3%. Quickly establishing itself as an excellent source of dividends, the mid-cap also raised its total payout by 46%!

In terms of risk, MAB is clearly exposed to a any downturn in the housing market. While the Stamp Duty holiday extension and the growing availability of 95% mortgages are reasons to be optimistic about demand, we still don’t know the full economic impact of the pandemic.

Secondly, the shares are even more expensive to buy than those of James Halstead. MAB has a forecast P/E of 31.

Of course, it isn’t necessary to invest in MAB directly to get exposure. The company makes up almost 4% of CFP SDL Free Spirit — a fund I hold within my own Stocks and Shares ISA.

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Paul Summers owns shares of CFP SDL Free Spirit. The Motley Fool UK has no position in any of the shares mentioned. 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 as far as AIM-listed floor product manufacturer and distributor James Halstead (LSE: JHD) is concerned, I’d argue this simply isn’t the case. 

While I don’t see this situation changing anytime soon (retail investors have a habit of gravitating to exciting ‘story’ stocks over profitable plodders), today’s positive interim numbers were more evidence that the firm is continuing to deliver for those that are aware of its existence. 

Quality stock

At £126m, revenue was unchanged over the six months to the end of December compared to the same period a year ago. Pre-tax profit came in 3.3% higher to £24.5m, leading CEO Mark Halstead to say the company had experienced a “satisfying first half“.  

There was more positive news for shareholders as far as dividends were concerned with the interim payout raised to a record 4p per share.

Before this morning, analysts had penciled in a cash return of 14.5p in the current financial year, which would represent a 7% increase on that returned in 2017/18. Based on the share price at the time of writing (450p), that equates to a yield of 3.2%.

That may not seem great in comparison to some of the high-yielding stocks that can be found elsewhere in the market, but I’d argue that Halstead’s long history of successive hikes to its cash returns is more important for those looking to secure financial independence through their investments.

Indeed, research has shown that those companies offering relatively low but consistently rising dividends tend to outperform those whose payouts, while large, hardly budge and are barely covered by profits.

Other things that attract me to James Halstead include a net cash position of £62.8m and the fact that it remains a family-run firm. The latter reassures me that management’s interests should continue to align with those of shareholders. 

At almost 24 times earnings forward earnings, it’s clear the £930m-cap won’t appeal to committed value investors. Nevertheless, I wouldn’t dismiss the stock simply because it trades on a high multiple. Sometimes, it’s worth paying up to acquire the best stocks for your portfolio. 

Powering back to form

Another company that has strongly rewarded shareholders over the long term but remains fairly unknown is critical power solutions provider XP Power (LSE: XPP).

The stock was out of favour during the second half of 2018 on concerns over a temporary shortage of components needed by the company. But recent news suggests that a recovery might now be on.

In its latest set of full-year numbers (released earlier this month), XP revealed 17% rises in revenue and pre-tax profit to £195.1m and £37.6m, respectively. 

Perhaps more importantly, chairman James Peters said the company was “encouraged” by its start to the new financial year alongside its “healthy order book.“

Although weighted to the second half and supported by a recent acquisition, the firm predicts that revenue will continue growing in 2019. 

Despite bouncing back to form in recent weeks off the back of this, XPP’s shares still look cheap on 13 times earnings and come with a secure 3.7% yield.

I’m so confident the company will fully regain its mojo in time, I’ve added it to my own ISA portfolio in March. 

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Paul Summers owns shares in XP Power. The Motley Fool UK has recommended XP Power. 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.

Investors seem to be gaining confidence that chief executive Warren East can deliver on his turnaround plans. There’s certainly a lot at stake. If he’s successful, I believe Rolls shares could look cheap at current levels in a few years’ time.

On the other hand, with the stock trading on 32 times 2019 forecast earnings, if East is wrong, then the firm’s share price could feel the pull of gravity again.

The problem for investors is that the company’s profits are back-end loaded. When Rolls sells a new jet engine, it doesn’t really make any money. The profits for each engine come from after-sales maintenance and support contracts, which may stretch out for a decade, or more.

All of this is perfectly legitimate, but makes it harder for outsiders to gain an understanding of the firm’s profits.

A long-term buy?

Since taking over at Rolls, East has delivered clear and consistent guidance and has been quite open about the changes he’s made. He expects the group to generate free cash flow of £1bn by 2020 and is aiming for a figure of £1 per share in the “mid-term.”

To put this into context, free cash flow is expected to have been between £450m and £550m in 2018. Obviously, there’s still a long way to go, but if the firm can hit the chief exec’s targets, then the shares look a decent value to me at under £9.

With Asian growth expected to power the civil aviation market for some years to come, I think Rolls-Royce could be a profitable long-term buy.

An overlooked performer

For a £1bn company, AIM-listed James Halstead (LSE: JHD) isn’t very well known. That’s probably not a big concern for this family-run flooring business, which has a stable fan base of long-term shareholders.

However, if you like to invest in buy-and-hold stocks, you may be missing out by ignoring this firm. It’s been in business since 1915 and remains under family management, courtesy of chief executive Mark Halstead.

The company manufactures and sells flooring products in most major global markets. In an update today, management said that profit margins improved during the final six months of 2018. A record profit is expected for the half-year and the group’s net cash balance is also expected to rise.

Why I’d buy

Looking back through the firm’s accounts for the last few years, my sums show average dividend growth of 9% per year since 2013. During this period, the payout has generally been covered by free cash flow and by the group’s net cash.

The shares currently offer a dividend yield of 3.1%, which looks attractive to me, given the strong growth rate. Although the forecast P/E of 24 looks expensive, I could live with this, given the income that’s on offer and the firm’s stable long-term performance.

I see Halstead as a stock to start buying today, with a view to building a larger position during the next market crash or recession.

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Well covered

A 3.6% rise in revenue to £249.5m isn’t too shabby, while profits before tax rose just 0.2% to £46.7m. These are both “records” but nothing to set the world alight. Earnings per share (EPS) rose just 0.6% to 17.7p.

There was some good news for shareholders, with the final dividend jacked up 4.3% to 9.65p, another of those records. Chief executive Mark Halstead made a nod to the global nature of the Bury-based business, proudly noting that recent floor covering contracts include the Forensic Laboratory of The Metropolitan Police in Buenos Aires and the new Schengen area of Athens Airport.

Steady as she goes

Group investment in product, processes and structures should lay the groundwork for continued progress, while weighing on profit growth. The £916m AIM-listed company has zero gearing, and a cash balance of £50.7m.

A company valued at 24.2 times forward earnings should probably be growing faster than this. The forecast yield of 3.2%, with cover of 1.3, looks less exciting in this context, although that cash balance means there is scope for further growth. Forecast EPS growth of 7% in the year to 30 June 2019 underlays a good solid stock, but one that is unlikely to leave you floored.

Good in Leather

International consumer products group PZ Cussons (LSE: PZC) is trading 2.5% higher today after issuing a trading statement reporting that overall results for the quarter to 31 August were in line with expectations. Good performance in Europe and Asia has offset challenging trading conditions in Nigeria, with management hailing its “robust and innovative product pipeline and tight control of costs”.

The £1bn FTSE 250-listed stock has accelerated product launches and boosted consumer engagement across key brands Imperial Leather, Carex and Original Source, and Sanctuary, St Tropez, Charles Worthington and Fudge in its beauty division. It posted solid performance in Australia and Indonesia, but has been struggling in Nigeria amid political uncertainties and subdued consumer disposable income. 

Soft soap

As my Foolish colleague Royston Wild recently noted, the group’s rising debt pile could potentially imperil the dividend. Don’t forget that in March, PZ Cussons saw its shares tumble 15% in a day after issuing a profit warning due to falling sales in Nigeria and the UK. The subsequent recovery has been patchy

It currently trades at a forward valuation of 16.7 times earnings, so is neither overpriced nor cheap. The forecast yield is 3.7%, with cover of 1.6. After four years of negative EPS, City analysts are now pencilling in 4% growth in the year to 31 May 2019, followed by 9% the year after. Revenue projections look sluggish, though. UK economic fears have hardly eased lately, which is a worry for its washing and bathing division. There’s more fun to be had elsewhere.

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Indeed, over the past five years the dividend distribution to investors has grown by around 10% per annum and, if today’s interim numbers are anything to go by, it looks as if this is set to continue.

On the up

Today, James Halstead reported what CEO Mark Halstead described as “yet another record half-year for sales and profit.” Revenue for the period to 31 December increased 5.4% to £126m, and pre-tax profit ticked higher by 20% to £23.7m. Earnings per share rose by 3.5% to 8.8p and off the back of these figures, management increased the interim dividend by 2.7% to a “record” 3.9p. 

For the full year, City analysts have pencilled in dividend growth of 7.7% taking the fiscal 2018 distribution to 14p per share, up around 100% in seven years, and giving an inflation-busting dividend yield today of 3.6%.

And even though James Halstead’s earnings growth rate is in the low single-digits, I believe the company can continue to grow its distribution above the rate of inflation for the foreseeable future. 

The dividend is currently covered 1.3 times by earnings per share, which gives management scope to increase the payout at a rate slightly more than earnings growth — precisely what the City is expecting for the next two years. Further, the distribution is backed by just under £48m of cash on the balance sheet, which according to my calculations is enough to maintain the payout for as long as two years if profit disappears altogether.

Customer support 

Another inflation-busting dividend champion I would consider including in my ISA is Games Workshop (LSE: GAW). 

What I like about this producer of fantasy gaming products is its robust reputation with customers and cash generation. While the retail sector in general has suffered from (and continues to do so) changing consumer preferences, Games Workshop’s unique customer base has continued to support the business. Over the crucial Christmas trading period, the company saw a “cracking” performance across its business, which continued through January and prompted management to inform the market that full-year profits are now going to be ahead of expectations.

A 71% increase in online sales for the six months to 26 November highlights just how strong demand for the firm’s brands is, contrary to broader retail sector trends.

With sales multiplying, cash generated from operations more than doubled during the six months, and with relatively low capital spending requirements, management is returning as much money as possible to investors. For the full year, City analysts are expecting the business to return 120p per share via dividends, giving an inflation-busting dividend yield of 5.5% at current prices. The distribution will be covered 1.5 times by earnings per share and is further supported by £29m of net cash on the balance sheet (at the end of the fiscal first half). 

Over the past five years, the company’s dividend has grown by just under 20% per annum, which gives me confidence that the payout can continue to grow above the rate of inflation in the years ahead.

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With that in mind, here is one FTSE 100 dividend stock which could be worth holding for the long term. Although it faces an uncertain future, its income return could be relatively high.

Improving outlook

The company in question is J Sainsbury (LSE: SBRY). It has experienced a challenging period which has included significant pressure on UK consumers, as well as heightened competition from discount retailers. This has caused a decline in the company’s profitability, with its earnings having fallen in each of the last three years. They are also expected to drop in the current year by 8%.

However, the company’s outlook appears to be positive. The acquisition of Argos could help the business to grow, as well as create cross-selling opportunities. The synergies from the deal could be significant and may help the group to offset any decline in sales growth over the medium term. In fact, the company’s earnings are due to grow by 12% in the next financial year. This puts the stock on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it offers excellent value for money.

Dividend prospects

With earnings expected to rise next year, Sainsbury’s may be able to afford a higher dividend. Shareholder payments are expected to rise by almost 10% in the next financial year. This puts the stock on a forward dividend yield of 4.6%. And with dividends set to be covered around twice by profit, there could be additional growth in shareholder payouts over the medium term.

Of course, there are other stocks which also have impressive income outlooks. For example, reporting on Friday was flooring specialist James Halstead (LSE: JHD). It stated that current trading is in line with its budgets, even though competitive headwinds have remained high. This represents a good performance at a time when margins have the potential to come under pressure. And with the company’s update stating that it is proposing a record dividend per share of 9.25p, it appears to offer significant income potential.

With James Halstead expecting to launch a number of new ranges and designs in 2018, it continues to be upbeat about its future outlook. With a dividend yield of 3% and dividends being covered 1.3 times by profit, its scope to deliver further growth in shareholder payouts seems high. Its earnings are due to rise by 4% in the current year and this could enable it to offer dividend growth which is above the rate of inflation. As such, now could be a good time to buy it alongside Sainsbury’s for the long run.

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Peter Stephens owns shares in Sainsbury's. The Motley Fool UK has no position in any of the shares mentioned. 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 two founders have followed a simple yet powerful strategy. The company acquires niche leaders in scientific testing and measuring equipment at reasonable prices, before growing them under the decentralised Judges Scientific umbrella. Usually, it pays down any debt on the balance sheet to allow unencumbered growth, while also supplying the capital necessary for its businesses to maintain their market-leading positions. 

Cicurel has an uncanny knack of acquiring these businesses at dirt-cheap prices too and by my estimation is still finding great deals even in today’s bull market. 

The shares haven’t exactly had the best time of it in recent years, however. The demand for scientific testing equipment isn’t constant, resulting in some choppy results. 

On top of that, the shares are down 10% today at the time of writing after the company announced that Cicurel has sold 157,727 shares. That’s 2.58% of all outstanding shares. 

However, the fall seems overdone to me and I view this as a buying opportunity. After all, even after that sale, the CEO still owns 12.4% of the company. Investors are worrying that the top executive is selling ahead of bad news but I feel we owe him a little more faith, given his wonderful track record. 

40+ years of dividend hikes

What sort of a business can increase its dividend for more than 40 consecutive years? I’d expect many investors to suggest a utility, a pharmaceutical company or perhaps some other non-cyclical stock. I don’t think many would guess that James Halstead (LSE: JHD), a manufacturer of specialist flooring, would have managed it, but it’s true. 

It’s an impressive result for a company that essentially sells a commodity. When I spoke to the management team a year or so ago, it seemed clear that a tireless focus on cost control and quality of product had propelled the business for decades. 

Perhaps this culture was borne out of its family-run roots (the clue’s in the name). The company has, after all, boasted a net cash position every year since 1997. Last year, revenue grew 6.5%, with earnings per share rising 3.5%. The final dividend was hiked a greater 8.8% but still remained generously covered by earnings. 

Perhaps the most impressive aspect of the business is its profitability. It achieved a 19.6% operating margin last year. 

I keep a close eye on Halstead, but trading at a P/E of 25 I get the feeling investors could wait for a better entry point. In my view, the 10% fall in Judges makes it the better buy, although the track record of both these companies is to be admired.

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Record turnover and profits

The AIM-listed group, based in Radcliffe near Manchester, announced record turnover of £240.8m for the 12 months ended 30 June, a 6.5% improvement on the £226.1m it reported in 2016. Pre-tax profits also hit record levels at £46.6m, 2.5% higher than the same period a year earlier.

The general weakness of sterling gave a boost to the group’s export activities, helping to increase competitiveness and margins, but this was tempered by a 5.2% fall in UK sales, and turmoil in the supply chain of raw materials. But I’m not overly concerned, as the drop in UK sales was entirely accounted for by de-stocking at two of its larger distributor chains, where conditions are now normalising, and the supply chain issues are also largely resolved.

James Halstead’s shares have suffered a sharp decline since hitting all-time highs in May, and are now trading close to 12-month lows. I see this weakness as an excellent opportunity for growth-focused investors to pick up the shares on the dip. The shares are by no means cheap however, trading at 24 times FY2018 earnings, but are well worth the premium pricetag in my view given the robust performance and promise of steady long-term growth.

Cheap construction play

Meanwhile, Ibstock (LSE: IBST) is another very promising growth stock that I believe may have gone unnoticed by the majority of retail investors. The FTSE 250 brickmaker has seen its shares perform exceptionally well over the past 15 months, doubling in value since July 2016. But I believe the recent pull-back in the share price could signal a buying opportunity for savvy investors on the lookout for a cheap construction play.

The Leicestershire-based group has a diversified range of clay and concrete products, with operations in both the UK and US. Its principal products are clay bricks, brick components, concrete roof tiles, concrete substitutes for stone masonry, concrete fencing and pre-stressed concrete products.

Leading brick manufacturer

The UK operation accounts for 81% of group revenues, with the Ibstock Brick business being the country’s leading manufacturer of clay bricks by volume. With 19 manufacturing plants, the business also boasts the largest brick production capacity in the UK, operating a network of 23 active quarries, generally located close to its manufacturing plants.

I believe the longer-term fundamentals for Ibstock and the UK housebuilding sector in general remain in place, with government support, good mortgage availability, and a continuing undersupply of new homes. Housing prices may fluctuate but the fundamental demand for homes among consumers from families to singles remains strong and this is good news for the bricks sector.

The shares trade on a fairly modest price-to-earnings multiple of 12, and offer a solid yield of 3.6%, with payouts covered more than twice by forecast earnings.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Is this 102-year-old firm, which operates in a mundane industry, worth buying today? Or is another AIM stock in a more exciting sector a better bet?

Scores on the floors

It’s easy to see why Halstead’s results didn’t have investors falling over each other to buy the shares today. Revenue increased a modest 4.3% to £119.6m, while pre-tax profit nudged up a mere 0.8% to £23.2m. Earnings per share (EPS) edged down to 8.5p from 8.6p, as a result of slightly higher tax.

The company said UK revenue declined by 7% and, while exports increased over 12%, this was largely down to weaker sterling. Growth at constant currency was 2.5%. Profit was dampened by upward price pressure on raw materials and overseas-sourced goods, with the firm’s operating margin dropping to 19.7% from 20.3%.

On the face of it, Halstead may not appear to be an attractive investment, because a trailing 12-month EPS of 16.9p gives a relatively high price-to-earnings (P/E) ratio of 29. However, I believe the stock is well worth buying for long-term investors.

Confidence

Halstead put the decline in UK revenue primarily down to de-stocking, which I don’t see persisting beyond the short term. Meanwhile, the international growth opportunity for the company is considerable.

Margins remain excellent, showing how well the business is managed, and the balance sheet is bombproof, with net cash of £51.6m. The board increased the interim dividend by 7.1%, giving a handy yield of 2.5%, and said that it’s “confident of progress through the year”.

Impressive growth

Pollster and data analytics specialist YouGov (LSE: YOU) released its half-year results on Monday. At a share price of 265p, the company is valued at £278m, making it another of the larger stocks on AIM.

YouGov reported more impressive growth than Halstead. Revenue of £51.4m was a 24% increase (8% at constant currency), while adjusted EPS increased 21%. The company trades on a trailing 12-month P/E of 27.6 — slightly lower than Halstead’s, but offset by a less generous dividend yield of 0.5%.

De-rating risk

On the face of it, with similar overall valuations, YouGov is the better buy, because of its stronger growth. However, Halstead reports only statutory EPS, while YouGov highlights adjusted EPS. A big part of the adjusted EPS is effectively a fiction that the company never has any software and software development costs, whereas in reality these things are a significant and routine cash cost for the business.

While all’s going swimmingly with growth, the market seems happy to go along with the adjusted EPS number. My concern is that there could come a time when the market decides a number closer to statutory EPS is more appropriate for valuation.

YouGov’s shares having performed strongly over the last few years and the gap between adjusted EPS and statutory EPS is so large that, while the former gives a P/E of 27.6, the latter gives an eye-watering 75.7. I believe there’s a risk of YouGov de-rating significantly at some point and for this reason I rate the shares a ‘sell’.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Brexit boost

The main impact of Brexit has been a depreciation of the pound. This has helped to boost James Halstead’s margins on its overseas sales, while making the company more competitive versus international peers. Although there are off-setting impacts from weaker sterling, such as price pressures on imported goods, the overall impact has been positive.

Looking ahead, it would be unsurprising if the value of the pound weakened further. The UK hasn’t yet invoked Article 50 of the Lisbon Treaty and so uncertainty has the potential to rise. That’s especially the case since both sides in the negotiations seem to be somewhat stubborn in their demands at this stage. While a deal may be reached within the two-year negotiating timeframe, the reality is that uncertainty may move higher during that time and cause the pound to weaken.

Weak trading

The positive effects of weak sterling have been offset by difficulties within the UK market. James Halstead’s market share in the UK hasn’t fallen, but the market for its goods is lower than last year. The best estimate of this is a reduction in demand of between 4% and 5%. This trend could continue in future, since most forecasts indicate a slowing down of the UK economy in 2017.

In addition, there has been significant upward pressure on the pricing of one of the company’s raw materials, plasticiser. This is due to reduced supply following an explosion at one of BASF’s European plants. While James Halstead has been able to access appropriate volumes elsewhere in the market, prices have moved higher due to an imbalance between demand and supply. This is likely to continue throughout the remainder of the year, which could negatively impact on the company’s financial performance.

And the outlook is…

James Halstead is expected to report a rise in earnings of 6% in the current year. While this is in line with the wider index, the company’s price-to-earnings (P/E) ratio of 25.5 indicates that it’s priced as a growth stock. Given the challenges faced in the UK market and the impact of supply disruption, it would be unsurprising for the current valuation to come under pressure.

Sector peer Balfour Beatty (LSE: BBY) is forecast to report a rise in earnings of 46% next year. Despite such a high growth rate, it has a lower rating than James Halstead. Balfour Betty’s P/E ratio of 23.6 shows that there’s scope for a significant share price rise over the medium term. It also offers a wide margin of safety, which means that if trading conditions worsen due to Brexit then its share price may still perform relatively well. As such, Balfour Beatty remains a sound buy, while James Halstead is simply overvalued.

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