One thing that’s better than a stock paying a good dividend now, is one that will pay a progressively bigger dividend over time. And I think I see one in the shape of Spirent Communications (LSE: SPT).
It provides testing and performance analysis technology to the communications industry, and that’s a profitable business. And though earnings have been erratic over the past few years, the dividend has been growing steadily.
The share price shed 4.5% on Thursday morning, despite first-half adjusted operating profit climbing by 67% to $17.4m and adjusted EPS putting on 86%.
Perhaps unchanged revenue figures or the interim dividend being pegged at 1.68 cents caused some disappointment, but I’m very encouraged to see free cash flow more than doubling to $28.7m.
Although the exit of some non-core product lines, plus delays in Ethernet testing, mean that revenue should be flat, full-year profit expectations remain unchanged, according to chief executive Eric Hutchinson.
That suggests the analysts’ consensus for a 29% rise in earnings for 2017 is on the ball, with a further 15% currently suggested for 2018. The share price has climbed over the past year, to 116p, giving us a forward P/E of 22 (dropping to 19 for 2018), and there’s been some boost based on takeover rumours.
But with growth set to continue (and a PEG of a modest 0.8), I see that as a decent valuation for a growth share. But more to the point, I think above-inflation dividend rises should take the currently-expected 2.5% yield to something very attractive in the coming years.
With cover by earnings set to grow even faster, and Spirent throwing off lots of cash, I really do see a future dividend star in the making here.
I wish I could say the same for Inmarsat (LSE: ISAT), but my confidence in the satellite communications firm’s dividend is waning.
We’re looking at mooted yields of better than 5.5% this year and next, but the pressure is building as EPS is expected to drop by 30% leaving dividend cash badly uncovered — and even an 18% EPS recovery indicated for 2018 would still leave cover at only 90%.
Though first-half revenue rose by 9.4%, largely due to contracts with various governments, adjusted profit after tax dropped by 10.3%. And the share price dropped by 3.3% to 762p in early trading as a result.
I am convinced that Inmarsat has a healthy long-term future, being one of the world leaders in its field (and with very high barrier to entry — satellites don’t come cheap), but the medium term looks like it could be erratic.
Volatility to come?
The firm said that “whilst we have delivered a robust performance in recent quarters, our markets remain challenging and the outlook continues to be difficult to predict,” and there are uncertainties over shorter-term government business.
Inmarsat did raise its interim dividend by 5% to 21.62 cents per share which would suggest confidence in its viability, and a scrip scheme introduced in 2016 should take some pressure off the demand for cash.
But at this stage, with a forward P/E of 22 while earnings are expected to fall, I just see this as a risky bet for those looking for reliable progressive dividends — and Inmarsat is not a buy for me right now.
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Alan Oscroft 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.