The Five Most Profitable, Debt Free, Dividend Paying Shares
John Kingham | Jun 01, 2015 15:30
Companies like this are often very successful, with competitive advantages that allow them to grow while paying out much of their earnings as a dividend. Their lack of debt also gives them greater flexibility, which means they are less likely to cut their dividend when they run into problems.
h3 These five companies each have:/h3- A 10-year unbroken record of dividend payments
- No interest-bearing debts
- A FTSE 350 listing (i.e. no small-caps)
- 10-year average post-tax return on capital employed (Net ROCE) above 15%
Dividend Yield: 4.1%, 10-Year Growth Rate: 8.1%, Average Net ROCE: 34.0%
PayPoint has developed a range of technology solutions to make payments simpler. So for example it has physical terminals in shops such as your local newsagent or Tesco (LONDON:TSCO) Express. You can use those terminals to pay your bills, top up your mobile phone or make energy meter prepayments.
In terms of online payments, you can use PayPoint technology to pay for parking via your mobile phone, and it was one of the early developers of internet payment services, which it still provides for sites like MoonPig and WHSmiths.
The chart below shows how successful the company has been over the years.
As a technology business, it doesn’t have to spend vast amounts on new factories or other capital expenses (capex) in order to expand. Its average net ROCE is extremely high at 34% and capex is usually about 20% of net profits, which is quite low. As a result, the company can pay out most of its earnings as a dividend and still grow rapidly.
I don’t own the company, but I think I would be happy to, although I haven’t run it through my investment checklist.
h3 IG Group Holdings (LONDON:IGG) PLC (at 785p)/h3Dividend Yield: 3.6%, 10-Year Growth Rate: 18.9%, Average Net ROCE: 25.9%
IG Group is the world leader in spread betting and contract for difference (CFD) services. It is also the UK’s leading provider of foreign exchange (forex) trading services for retail traders.
Get The App
Recently it moved into execution-only stockbroking, where it hopes its advanced technology will provide a good alternative to existing execution-only platforms.
As with PayPoint, IG is primarily a technology business with no need to build factories or buy other heavy (and expensive) equipment in order to expand (capex is typically very low at just 10% of post-tax profits). Again, this means it can pay out most of its earnings as a dividend and still expand rapidly as the chart below shows.
Of this group of five companies, this is the only one I currently hold, with IG making up about 4.5% of the UKVI portfolio and a similar amount in my personal portfolio.
I bought the company’s shares in September 2014 and so far they have done very well, producing 5.1% in dividends and 29% in capital gains. Of course, nine months is far too short a period to say anything about how the investment will work out over the longer-term.
h3 Victrex (LONDON:VCTX) PLC (at 2,087p)/h3Dividend Yield: 2.2%, 10-Year Growth Rate: 13.0%, Average Net ROCE: 22.6%
Victrex is the world leader in high-performance aromatic polyketone solutions. And no, that doesn’t mean anything to me either. In layman’s terms it means they design and manufacture plastics for use in high-performance situations, such as smartphones (thinner, lighter), cars (durable, low friction) and aeroplanes (strong, light).
The company started off as part of ICI where the polyketone (PEEK) patent was filed. Eventually, Victrex was bought out by management and subsequently listed on the London Stock Exchange.
The company has been extremely successful over many years, only stumbling very slightly during the financial crisis.
Early in its life Victrex relied on its PEEK patent, but that has long since expired and supplying the basic PEEK resin is now a commodity business with unexceptional margins.
Rather than patents, Victrex now relies on its deep expertise with PEEK to keep profitability high. It does this by developing novel PEEK compounds and inventing PEEK-based products like films, coatings and pipes. It also works closely with customers to develop bespoke PEEK-based solutions.
Victrex is another low-capex business, with capex usually around 50% of post-tax profits. That’s more than the previous companies in this list, but still below the average for companies in general.
h3 Aveva Group (LONDON:AVV) PLC (at 1,967p)/h3Dividend Yield: 1.5%, 10-Year Growth Rate: 13.8%, Average Net ROCE: 19.2%
Aveva develops, sells and supports computer software. It sells this software to companies that are involved in large, complex engineering projects such as those in the oil and gas sector. Its products typically fall into one of these two categories; engineering and design systems or enterprise solutions.
Having worked in the software industry, I know that large, complex pieces of software that are tailored to a customer’s specific needs often become a key part of that customer’s business. It becomes very difficult and expensive from them to switch supplier and so companies in that situation tend to stick with the same supplier for many years or even decades.
Around 70% of Aveva’s revenues are annually recurring, so the company has good forward revenue visibility. As a software company, it has no heavy capital expenses to make, although it does need to spend heavily in order to continually develop new, better product offerings.
The company has a solid 10-year Growth Rate of 13.8% (which I calculate as an average of revenue, earnings and dividend growth over a decade) and investors must be expecting that high growth to continue, otherwise it would not make sense for the shares to have a sub-2% dividend yield.
h3 Greggs (LONDON:GRG) (at 1,209p)/h3Dividend Yield: 1.8%, 10-Year Growth Rate: 5.5%, Average Net ROCE: 18.0%
Greggs is, of course, the well-known high-street baker, although it’s probably incorrect to call the company a baker as nothing (as far as I’m aware) is baked in-store anymore. But that hasn’t stopped the company from being extremely successful over many years.
In fact, recently it’s had a bit of a growth spurt, as the spike in earnings and dividends in the chart below shows.
The share price has also rocketed up, having gone from 400p in 2013 to 1,200p today. I did own this company for about three years, but sold in 2014 for just under 600p (which is either irrelevant, or means I’m an idiot, depending on whether you think future share prices are knowable).
Regardless of what the shares are doing, Greggs has been a class act for a long time, and its ongoing transition from a traditional baker to a food-on-the-go retailer is helping it to stay highly profitable.
As a retailer Greggs rents rather than owns most of its high street locations, which tends to flatter return on capital employed. Some investors like to capitalise lease expenses, although it isn’t something I do (yet).
So there you have it. A list of five companies that are consistent dividend payers, debt free and highly profitable. I’ve owned one of them in the past, I own one of them today, and I’d probably buy the others if the price and timing were right (after a somewhat more detailed analysis, of course).
Disclaimer
Original Post
/h3
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.