Friday, 6 March 2015

BUY: Babcock International (BAB)--High Growth Engineering Support for My Portfolio

Price: 959.85
Shares: 72
Predicted annual dividend income: £15.70

After a series of high yield and slow growth purchases recently (Amlin, HSBC, National Grid and Shell) I have been directing more attention to lower yield, higher growth stocks.

One such company I have been watching for some time has been the engineering support services company, Babcock International (LON:BAB).

The FTSE 100 company with a market capitalization of about £5 billion has seen its share price on a steady downward course for some time. Indeed, around this time last year it was hitting its all times high just shy of 1300p. Since then it has declined about 25% to about 970p--approaching its all time low.

Nonetheless, throughout this time it has continued to produce the stonking growth rates it has consistently delivered since it changed tack in the early 2000s to providing engineering support services. Although not guaranteed to continue, most commentators agree that it is likely to do so.

What is more, the high dividend growth has also continued unabated--even through the financial crisis.

With it now sitting around its all time low it has tantalised me enough to finally make a purchase. But why?

Excellent Value

There does not seem to be any reason for the decline in my eyes. The earnings per share (EPS) predictions show a company anticipated to show continued strong EPS growth over the short to medium term. As we can see from the predictions for this year (to the end of March 2015), though, there is a slight decline (about 3%) anticipated for this year:

EPSP/E Ratio
Difference (%)6.91

These are pretty tight predictions. The difference between the highest and lowest prediction is a very narrow 7%. As a consequence, both the low and consensus EPS predictions show a P/E ratio of about 14. That is pretty low.

However, for the year starting at the end of this month it gets better with Babcock returning to the rate of growth long-term shareholders have become accustomed to. Here are the figures:

EPSP/E Ratio
Difference (%)9.63

Again, the predictions are very narrow. What is more they all show strong growth is predicted. A consensus P/E of 12.41 is wonderfully low. Even the lowest EPS predictions offers a P/E of 13--hardly expensive especially for a company with such a solid record of growth.

Current predictions also suggest a consensus prediction EPS to March 2017 of about 87p. Another huge growth. All looks good, then, going forward.

High Dividend Growth

Babcock has a strong history of dividend growth. Although a rights issue in May 2014 complicates the dividend comparison they show 5 year annualised growth of about 14%. 

Current predictions suggest that the dividend for the full year to March 2015 will be 22.08p. This is a yield of  2.3%.

Predictions for the year to March 2016 and March 2017 are currently penciled in as 25.1p and 28.5p per share. These would be a yield of 2.6% and 2.9%. Certainly not world beating, but not insignificant either. What is more, if the rate of growth is maintained we should hopefully see a continually growing return. 

Solid Dividend

What is more, this is a pretty secure dividend as well. The cover is set to remain comfortably above 3 times earnings. With secure cover often seen as being anything above 2 times earnings, this is very secure indeed.

Bearing in mind that Babcock aim to maintain cover of between 2.5 and 3 times over the long term it looks as though they may even show a higher rate of dividend growth in the near future. As current predictions shows the dividend cover growing even after the rapid dividend growth predicted. 

Overall, then although a small yield it seems set to continue its rapid growth going forward. All looks very good in this area!

Other Numbers

Babcock also looks encouraging in other regards. Since 2010 its debt levels have declined by about 4.3% leaving it on a debt to equity value of 0.69--safely under 1.

What is more,  over the same period its cash reserves have increased by 83%. Although that was from a low level and cash reserves only amount to 14.14p per share. Nonetheless, the fact that the trajectory is upwards is excellent!

Babcock and My Goals

So how does Babcock fit into my goals for 2015?

Clearly its low immediate yield will pull me back a little from my target of a 4% portfolio dividend yield. Similarly, its low yield means that it will not push me a long way towards my target of £800 for the year. However, an additional £15 will certainly help. Over time, the growing yield will hopefully prove itself a very good investment.

What is more, Babcock is a very low volatility stock with a beta of about 0.61--nicely below 1. This will help me to achieve my target of a Beta portfolio value of 0.85 or less. Hopefully this will help insulate me a little if the market gets a bit choppy.

Also--being another fairly large investment in comparison to the past--my trading fees amount to well below 1.3% of the total cost at about 1.22%. As a result, it will help me to bring my fees down below my target of 1.3% or less for the year. All good there too!

Finally, as a new holding I am now holding 25 different equities. As a result, I am already at my target of holding between 25 and 30 holdings by the end of 2015. 

Overall, I am extremely happy with my Babcock purchase. I look forward to seeing the predicted growth (hopefully) becoming reality and seeing--in turn--Babcock providing even more towards my future and long-term goals!

[Image reproduced from Babcock International]

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  1. Definitely one to investigate, As we discussed, it didn't pass my screener, so I'm going to make comparisons ona few different websources and see what the outcome is. I'll let you know!


    1. Definitely worth investigating, as you say! Will be very interesting to see what your research throws up. Please do keep me posted.

      What I did forget to mention in the post is the levels of earnings visibility the company has. It now has about £20 billion in orders. Although perhaps not the same scale or reliability (being services) as the likes of Rolls Royce it is very impressive. Compares favourably, as well, to our favourite Interserve!

  2. nobody can knock Interserve!

    1. It certainly seems hard to! I notice the share price is back down again recently. It is looking tempting again!