Image source: Getty Images
Not many UK stocks consistently grow their dividend per share by a double-digit percentage each year.
But one medium-sized British company has managed to do that over the past few years, like clockwork. It currently yields 3.4% — and the double-digit percentage dividend growth looks set to keep coming, in my view.
Yet the share is 57% cheaper today than it was five years ago. What is going on?
A simple, smart business model
The UK stock in question is Judges Scientific (LSE: JDG). Over the years, the company has used what I regard as a clever and straightforward business model.
It identified an area where deep-pocketed customers are willing to pay for product quality: scientific and lab measurement tools. But rather than building its own capabilities from scratch, Judges’ approach has been to acquire small, well-established businesses that already have customer bases.
This can often be done cost-effectively, for example when a founder’s retiring and wants to sell their business.
By offering centralised services to these subsidiaries, Judges can bring economies of scale they would previously have struggled to achieve on their own, boosting profitability.
What’s gone wrong?
So far, so good. That business model has helped this UK stock achieve its impressive record of dividend growth. However, the Judges Scientific share price has more than halved in five years.
This reflects multiple challenges to the business model. US spending uncertainty has meant business there has suffered. Meanwhile, tax policy changes affecting Chinese government-funded purchases of scientific equipment may not sound exciting – but they have also contributed to a slowdown in Judges’ business.
The first half saw order intake decline 12% year-on-year. Revenue fell by over a fifth.
Can the dividend keep growing?
Meanwhile, the interim dividend was raised by 10%. Given that Judges made a loss in the first half, that dividend was not covered by earnings. In the short term this is not a problem, but longer term for the dividend to be maintained let alone increased, Judges will need to generate sufficient free cash flows.
Judges has also seen management changes this year that I think have negatively affected investor confidence, given how strongly the previous incumbents performed. Things have not been helped by challenging market conditions and I see a risk they will persist.
However, the company now has a market capitalisation of £233m. Last year, it generated £33m of cash from operations. Even taking £48m of net debt into account, that valuation looks attractive to me for a company of this quality.
The reason I expect management to keep growing the dividend each year is because it is a large part of the investment case. Given the share price fall in recent years, the passive income offered by this UK stock has been a key element of its appeal, I reckon.
But not only do I like the dividend, I also like the longer-term growth opportunities offered by the business model once end market conditions become easier again. I therefore think the share is worth considering.
What income stock do we like better than Judges Scientific Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Christopher Ruane does not hold any positions in the companies mentioned.
Image source: Getty Images
Not many UK stocks consistently grow their dividend per share by a double-digit percentage each year.
But one medium-sized British company has managed to do that over the past few years, like clockwork. It currently yields 3.4% — and the double-digit percentage dividend growth looks set to keep coming, in my view.
Yet the share is 57% cheaper today than it was five years ago. What is going on?
A simple, smart business model
The UK stock in question is Judges Scientific (LSE: JDG). Over the years, the company has used what I regard as a clever and straightforward business model.
It identified an area where deep-pocketed customers are willing to pay for product quality: scientific and lab measurement tools. But rather than building its own capabilities from scratch, Judges’ approach has been to acquire small, well-established businesses that already have customer bases.
This can often be done cost-effectively, for example when a founder’s retiring and wants to sell their business.
By offering centralised services to these subsidiaries, Judges can bring economies of scale they would previously have struggled to achieve on their own, boosting profitability.
What’s gone wrong?
So far, so good. That business model has helped this UK stock achieve its impressive record of dividend growth. However, the Judges Scientific share price has more than halved in five years.
This reflects multiple challenges to the business model. US spending uncertainty has meant business there has suffered. Meanwhile, tax policy changes affecting Chinese government-funded purchases of scientific equipment may not sound exciting – but they have also contributed to a slowdown in Judges’ business.
The first half saw order intake decline 12% year-on-year. Revenue fell by over a fifth.
Can the dividend keep growing?
Meanwhile, the interim dividend was raised by 10%. Given that Judges made a loss in the first half, that dividend was not covered by earnings. In the short term this is not a problem, but longer term for the dividend to be maintained let alone increased, Judges will need to generate sufficient free cash flows.
Judges has also seen management changes this year that I think have negatively affected investor confidence, given how strongly the previous incumbents performed. Things have not been helped by challenging market conditions and I see a risk they will persist.
However, the company now has a market capitalisation of £233m. Last year, it generated £33m of cash from operations. Even taking £48m of net debt into account, that valuation looks attractive to me for a company of this quality.
The reason I expect management to keep growing the dividend each year is because it is a large part of the investment case. Given the share price fall in recent years, the passive income offered by this UK stock has been a key element of its appeal, I reckon.
But not only do I like the dividend, I also like the longer-term growth opportunities offered by the business model once end market conditions become easier again. I therefore think the share is worth considering.
What income stock do we like better than Judges Scientific Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Christopher Ruane does not hold any positions in the companies mentioned.
