There are not many FTSE 250 companies that can boast an 18-year unbroken run of dividend increases.
Clarkson (LSE: CKN), a worldwide leader in shipping services, has quietly gone about its business of keeping world trade moving for the last 170 years, but until recently it was a business that I knew little about.
A Christmas conversation with a friend, whose son had recently started work in London as a trainee shipbroker, was my entrée to Clarkson. Before looking at the inner workings of this company, though, I thought it best to understand a bit more about the notable current challenges facing the shipping sector.
Why is there a supply chain crisis?
Prior to the Covid-19 pandemic, the spat over tariffs between the Trump administration and the Chinese government had already caused significant volatility in worldwide trade. The subsequent impact of Covid-19 was immediate and hard hitting.
Overnight, the demand for fossil fuels collapsed, leading to the incredible short-term reality of negative oil prices. Tanker ship contents were unsaleable and market players rushed to offload these cost-sapping cargos.
Surprisingly, though, as the full effect of the pandemic began to bite, there was a sudden increase in demand for consumer products worldwide, as locked-down populations changed their behavioural patterns.
Spending on services — such as travel, hotels and restaurants — obviously collapsed, but home-based consumers soon ramped up demand for hard goods, such as electrical products and homeware materials.
A fall in manufacturing capacity and the available resourcing of ports and shipping led to the perfect storm – resulting in the lengthy delays we now face in securing that new car or television.
With all this volatility, is it therefore a good time for me to invest in the shipping sector?
My immediate thought is that such volatility means that it is an area surely best avoided at this time. Some further research of Clarkson, though, demonstrated just what a robust operator this company is and piqued my interest further.
The company generates around 75% of its total revenue from shipbroking services and has been able to maintain consistent performance throughout the pandemic. It is also no slouch in embracing new sectors, such as the supply and development of the offshore renewables business, which bodes well for the future.
Clarkson looks after both its staff and its shareholders. Bonus payments are high and dividend payouts over the years have typically ranged from 65% to 75% of its total available earnings. The company does, however, retain a substantial cash buffer, allowing it to maintain its commitment to increased dividends in leaner years.
A short trading update issued in January mentioned that the company expected its underlying profits for 2021 to exceed £69m (50% higher than comparable 2020 numbers). On that basis I expect that its earnings per share will exceed pre-pandemic levels, and that the dividend payment will be comfortably increased for another year.
Going forward, I believe that Clarkson will continue to be a market leader in the shipping services sector. However, with an estimated price-to-earnings (P/E) ratio in the 20s and a dividend yield of around 3%, it’s not cheap at 3,260p.
Whilst I trust in management’s ability to maintain dividend payouts for the foreseeable future, I think I will wait a while longer before looking at this stock again.