Today’s full-year results from advanced wound management specialist Smith & Nephew (LSE: SN) encourage me to believe the firm could perform well from here. Underlying revenue is up 4% for the year, trading profit margins have inflated by 80 basis points to 23.7%, and the directors intend to pay a dividend 4% higher than last year.
Good trading everywhere
The firm’s chief executive tells us that Smith & Nephew saw a strong final quarter with “excellent” results from the US in the areas of sports medicine, knee implants and advanced wound management. However, growth also occurred in the firm’s activities in both Europe and emerging markets.
The outlook is good, and the CEO expects further underlying revenue growth during 2016 as the company benefits from investments in “the existing businesses, acquisitions, and pioneering technologies.”Â
City analysts following the firm expect earnings to lift 10% in 2016. At today’s 1,114p share price, Smith & nephew trades on a forward price-to-earnings (P/E) ratio of around 19 for 2016. Meanwhile, the dividend yield runs at just over 1.9%, and those forward earnings should cover the payout just over three times.
When I see a growing business with a well-covered dividend yield, it makes me believe that the directors still see plenty of opportunity plough funds into investment for further growth. If they didn’t, they would probably return more of the free cash operations generate to share holders, by raising the level of the dividend payout.
Steady growth
Vodafone Group (LSE: VOD), the telecommunications company, updated the market today and trading seems to be steady. The firm has been investing in its 4G and fibre networks in the hope that it can attract more customers by delivering an enhanced user experience.
Vodafone’s chief executive reckons the company saw “a strong performance in South Africa and improving trends in Germany and Italy” over the last three months, indicating that it’s strategy seems to be working. The CEO says seven million new customers took up services with Vodafone over the quarter, and that there is good momentum in the firm’s mobile offering, with some acceleration the company’s fixed line products. He puts this down to the way Vodafone is pushing converged services into more markets.
On a note of caution, the chief executive reckons Vodafone faces ongoing regulatory and competitive challenges in many of its markets, but he is confident that the business is “well positioned for the growth opportunities ahead.”
Looking at Vodafone’s valuation, I’d say that the growth message is getting through to investors, because a lot of potential seems to be accommodated in the price already. At today’s 211p share price, the forward P/E ratio runs at just over 36 for year to March 2017. Meanwhile, the forward dividend yield is 5.4% or so, which looks healthy but deserves some caution. City analysts following the firm expect earnings to lift by 19% to March 2017, but even then those earnings only half cover the forward dividend payout.
I wonder if Vodafone’s elevated valuation may hold the shares back, allowing Smith & Nephew to surge ahead, at least in the near term.