Does FTSE 100 listed Babcock International offer dividend appeal?

Babcock International dividend

Shares in engineering services company Babcock International (LON: BAB) (BAB.L) surged almost 6% yesterday, after the group released a positive trading update.

The FTSE 100 listed company announced that trading was in line with expectations and that revenue visibility had continued to improve, with 89% of revenue now in place for 2017/18. The update stated:

The order book and bid pipeline of opportunities have remained stable, and continue to provide confidence in our ability to grow revenue as expected over the medium term.”

Investors have been concerned that new accounting rules might impact profits at Babcock, however, the company advised that the rules should not have a significant impact on earnings.

Babcock shares have experienced a tough run since 2014, declining 40% since the company announced a rights issue to buy Helicopter firm Avincis. At the current price of 836p, the stock’s forward looking P/E ratio is just 10.0. Does Babcock offer value from a dividend investing perspective?

3.4% trailing dividend yield

Babcock paid dividends of 28.2p last year, which at the current share price equates to a yield of a robust 3.4%. Underlying earnings per share were 80.1p, giving a healthy dividend coverage ratio of 2.8 times.

Dividend growth

A glance at the company’s dividend growth history reveals an impressive track record.

Babcock dividend history

Source: /my annotation

While some data providers suggest the dividend was cut in 2014, if we account for the 5 for 13 rights issue, it’s clear the dividend was not cut.

Over the last four years, Babcock has paid out dividends of 21.4p, 23.6p, 25.8p and 28.2p, resulting in a strong dividend compound annual growth rate (CAGR) of 9.6%.

City analysts forecast dividend growth of 5.3% and 7.0% this year and next.

Woodford holding

It’s also interesting to note that Neil Woodford is a holder here, having bought the stock back in 2014 at much higher prices, and adding to his holding after the Brexit vote last year. At the end of August, Babcock was the 14th largest holding in Woodford’s Equity Income fund with a portfolio weight of 1.96%.

Taking all of this into consideration and considering the low valuation on the stock, Babcock certainly looks to offer potential from a dividend investing perspective, in my view.

Disclosure: Edward Sheldon, CFA has no position in Babcock International.  

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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