I’m confident that Ashtead Group (LSE: AHT) is a share that can continue to deliver strong and sustained dividend growth for many years into the future.
Why am I so bullish? Well, the cyclical nature of this firm’s end markets — Ashtead rents out industrial equipment primarily to the construction sector — should, on paper at least, mean that it should be suffering some temporary business bumpiness right now. But the FTSE 100 firm is showing no signs of strain at all.
Big in America
Much has been made of the increased challenges for the US economy since the latter half of 2018, most notably the strains brought by President Trump’s trade wars with China and companies bracing for multiple Federal Reserve rate hikes.
However Ashtead, which sources almost 90% of group profits from its Sunbelt division spanning the US and Canada, thumbs its nose at expectations that trade may have suffered more recently. In fact it continues to go from strength to strength as more and more companies and individuals switch from the traditional phenomenon of equipment ownership to renting instead.
Revenues at the London-headquartered company swelled 19% in the three months to January, to £1.05bn, speeding up from the 18% advance printed in the first fiscal half. And as a consequence, profit before tax swelled 17% to £254m.
Space to grow
Ashtead has said that it continues to witness “strong end markets in North America” and this is why the Footsie firm is investing increasingly heavy amounts in expanding its operations through a mixture of acquisition activity and organic investment under its ‘Project 2021’ programme. This is a scheme designed to eventually grow its store network in North America to some 900 locations.
Ashtead invested an incredible £1.29bn in the nine months to January, up from £859m in the same period last year, whilst it also hiked spending on bolt-on purchases to £491m from £315m previously.
Dividend surge
There’s no reason for income investors to fear the huge sums that Ashtead is spending to grow the business, though. The company throws up so much cash that it recently embarked on a £550m share repurchase scheme, and its net debt/EBITDA leverage at 1.8 times, falling well within its target of 1.5 times to 2 times, provides space for it to keep rewarding its shareholders generously.
City analysts certainly believe so, and therefore forecast that the exceptional dividend growth of recent years will continue. The 33p per share total dividend last year is predicted to rise to 37.9p this year and again to 41.1p in fiscal 2020.
Now subsequent yields of 2% and 2.1% respectively might not be the biggest in town, but this doesn’t dull my belief that Ashtead is a brilliant income share to buy today. I fully expect dividends to keep moving higher many years into the future as rampant expansion supercharges the bottom line.