Friday 22 August 2014

BUY: Carillion Plc--Building my presence in the construction sector

Price: 339.87
Shares: 150
Project annual dividend return: £26.40

Carillion is of course one of those companies that has a pretty high visibility. Its various projects are all over the place with its logo emblazoned all around. Its vans and employees (with high visibility jackets) are seen across the country. Much like its rival--and recent bid target--Balfour Beatty it is a company you almost certainly notice from time to time.

However, Carillion has caught my eye quite a bit over the last few months for different reasons. The company which specialises in construction and engineering services has a lot going for it. This is especially true in the dividend stakes.

I have been looking for some time to move some of my portfolio funds into the industrial sector as it has had no exposure up to this point. Carillion has previously intrigued me but I had not, up to this point, acted on it.

So why have I finally jumped aboard Carillion?

Dividend Growth

Carillion's dividend growth record is very solid indeed. Since 2006 they have increased their dividend by an annualised rate of nearly 10%. Certainly in recent years this growth has slowed somewhat. 

However, growth has continued and I expect it to increase faster going forward as the economy drags itself out of the residual damage done by the financial crisis.This seems to be mirrored by the analysts who also find it likely that the dividend will continue its modest but consistent growth.

Good Value

Carillion is also trading at a reasonable price. This year there is anticipated by analysts to be a slight drop in growth which is predicted to be reversed next year. Nonetheless, the shares are trading around a P/E ratio of 10.

Here are the figures for 2014:

EPSP/E Ratio
Difference (%)25.24

This is encouraging as even with the lowest earnings per share (EPS) prediction Carillion is still expected to be trading at a P/E ratio of  under 12 which to me is still reasonable. Assuming the consensus value is closer to the mark means that it is trading at a P/E ratio into bargain territory.

For 2015, with the predicted return to growth the figures are even better:

EPSP/E Ratio
Difference (%)24.77

Again, even with the lowest predicted EPS we have a P/E ratio of under 11. These look pretty neat to my eyes.

Strong Dividend Coverage 

Another reason to believe that the continued dividend growth will be able to continue is the dividend cover Carillion has in place. Currently, analysts predict an 18.1p and 18.45p per share dividend for 2014 and 2015.

With these figures plugged into the assessment we see that the dividend cover on the consensus EPS prediction is 1.84 times for 2014 and 1.9 times for 2014. This is very close to the ideal coverage of 2 times and clearly, if earnings continue to grow in the future we should hopefully see this continue to be strong.

Even when we use the lowest EPS predictions we have cover of 1.57 times for 2014 and 1.68 for 2015. Although edging away from the highly attractive 2 times coverage it is still above the comfortable 1.5 times cover I look for.

Stonking Dividend Yield

What is more, with this consistently growing and well-covered dividend we also have a high starting yield.

Assuming the 18.1p and 18.45p dividend predictions we would have a yield on purchase price of 5.33% and 5.43% for 2014 and 2015. This is an excellent yield well above the FTSE 100 average currently at 3.5%. Again, another attractive quality.

Overall, it is therefore of little surprise that Carillion represents one of the top 5 holdings in the SPDR UK Dividend Aristocrats ETF. It has a strong and large yield as well as solid growth credentials.

Beyond the Figures

I also like the fact that Carillion has a solid history for merger and acquisition success. these include purchases and integration of Mowlem and McAlpine. Not only were these achieved successfully but also managed to achieve the cost-savings they promised in the process. This is an important and impressive element to consider. Even though the Balfour Beatty deal fell through, if Carillion start looking elsewhere they have the track record to suggest they would make any deal highly successful.

What is more, as they increasingly look for opportunities overseas I expect to see growth accelerate in this area. They already have a growing presence in the Middle East and Canada. I see no reason why they cannot continue to build on success in these two areas as well as expand elsewhere too. This all bodes well for future growth.

Another encouraging element is its record for sustainability. Obviously most companies claim a sustainable record, but certainly Carillion appears to have a strong record for coming true on their claims.

Fitting into my Goals

Carillion is a very welcomed new addition to my portfolio and hopefully help me achieve my investment goals for the year. 

It is the first company from the industrial sector to be added to my holdings. Consequently, It has made a small but welcomed contribution in broadening my sector exposure as can be seen below: 

What is more, Carillion has a very low Beta of (at the time of writing) 0.75. Consequently it should help me reach my target of having a sub 0.9 Beta value for my entire portfolio.

Of course, the high yield nature of Carillion's dividend should help me push my way towards my portfolio dividend yield target of 3.5% or more. Similarly, in 2014 I will receive the interim dividend payment of 5.6p per share which should help me reach my £200 dividend target for my first year.

Analyst Predictions

  • Berenberg--Buy--380
  • Liberium Capital--Buy--300
  • Investec--Buy--380
  • Jefferies International--Buy--518
  • Cantor Fitzgerald--Buy--420

What do you think?

Do you hold Carillion or another services company? Would you consider investing in or growing your holding in Carillion?

[Creative Commons image from Flickr user Elliot Brown]

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