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.
Solid growth
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.
Under pressure
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.Â
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.