Tuesday 24 March 2015

BUY: Interserve (IRV)--Topping up on a Service Ace

Price: 606.82
Shares: 100
Predicted annual dividend income: £23 (this purchase) and £64.40 (entire holding)

That's right. Another top up in my holding in the FTSE 250 support services company Interserve. I have now bought into the company three times in the last 6 months or so. My first purchase was in September 2014 with a follow up in January 2015.

And, no--before you ask--I have not got a keyboard which can only type the letters "I", "R" and "V" and therefore seriously restricting my investing universe. It is quite simple. The company seems to me to be incredibly undervalued.

Let's have a quick look why.

Bargain Basement P/E (and PEG!)

The simple fact is that it seems investors are still hugely undervaluing Interserve. 

Now since my purchase in January, analysts have shifted their earnings predictions for 2015. The consensus EPS has thus dropped a little (from 63.84p) but has tightened up between the highest and lowest predictions (from nearly 11%). This leaves us with these figures:

EPSP/E Ratio
Difference (%)2.57

As we can see, even the lowest prediction shows a P/E below 10 which is often considered as a sign of bargain basement stock. The consensus prediction would suggest EPS growth of about 8.5%. And this is from 7 different analysts' opinions so it is even more encouraging to read.

So what about 2016? Again, the consensus prediction estimates a further 9% EPS growth meaning the P/E dips even further below 10!
EPSP/E Ratio
Difference (%)5.88
Also, it is interesting to note that analysts have a far tighter set of predictions than you would ordinarily expect for such a future date. Less than 6% difference between the highest and lowest predictions. 

Such is the combination of low P/E and high growth we have PEG ratios of 1.1 and 0.9 for this year and next. This is bang on the money for bargain basement stocks offering both value and growth!

Again, it seems too good to be true.

Dividend: High and Hugely Consistent

I noticed when I first invested in Interserve that they have a sterling dividend record. As far as I have managed to discover they have grown their dividend consistently since at least the late 1990s. 

Since 2004 they have grown their dividend at an annual rate of 5%. Not too bad at all even if it does not set the world alight. 

However, the rate of growth has been increasing of late. Since 2011, the dividend has grown at an annual rate of about 6.6%. The most recent 2014 dividend having grown by 7%.

Analysts expect the growth rate to be a little slower than in 2014 but still about 6% per year for the next two years. This would produce dividends of 24.4p and 25.96p. This would throw out yields of 4.02% and 4.28% which is a very nice yield indeed.

What is more, even with these very healthy yields they are looking to be very well covered by earnings. Using consensus predictions it should be covered about 2.6 times by earnings in both years. 

Even with the lowest EPS estimates it should be covered about 2.55 times by earnings. As such, it is well above the usual high safety value of 2 times. 

Coverage has been growing in recent years as earnings have grown faster than the dividend. It is thus not entirely unlikely that the dividend may grow faster going forward. There is certainly plenty of scope for it to do so.

Solid Cash Reserves and Reasonable Debt

It is not as if any of the other metrics look unappetising. Cash reserves were reported as being pretty high at £77 million. This means that they have about 53.5p per share in cash--about 9% of the current share price. This is higher than most in the support services sector.

Debt to equity levels are also not too bad at 0.75. Again, for the support services sector this is above average. 

The recent figures also suggest that Interserve is currently trading at a premium to book value of about 86%. Again, well above average for the sector.

Qualitative Aspects

Also, what was encouraging is that Interserve has shown a healthy balance between organic and acquisition growth. they have shown themselves extremely able to integrate new acquisitions well. However, at the same time they have continued to improve already integrated business and grow reliably there.

Furthermore, despite the recent announcement that the Chairman plans to leave. The board remains a very stable and able one. All bodes well for the future.

Interserve and my Goals

Interserve is also a healthy contributor to my goals for the year. The yield--set to be above 4% this year--means that it contributes nicely to my target of 4% or more for my portfolio.

Similarly, seeing as I will receive both the 2014 final dividend (going ex-dividend in early April) and 2015 interim dividend this calendar year it should add a nice additional £23 or so to my £800 dividend income target for the year.

Interserve also has a very low Beta of around 0.4. As a consequence, it helps me to reach my goal of having a Beta of 0.85 or less for my portfolio.

My purchase is a little smaller than some of the others so far this year. As a result, my trading fees were about 1.32% of my total investment. This is slightly above my target of 1.3% or less for the year. I will have to watch out for this going forward.

All in all I am delighted with my most recent Interserve purchase. It now represents my second biggest single holding in my portfolio (behind GlaxoSmithKline and marginally ahead of HSBC). I think it deserves to be too!

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[[Creative Commons image reproduced from Flickr user Graham Richardson]]


  1. Hi DD,

    Congrats - that looks like a solid company and one committed to dividend growth too!

    As far as I can tell they've increased dividends since at least 1997 - I'm currently showing since 1995 in my list but there was a reverse stock split in 1997 which counted as a dividend decrease - assuming published values haven't already included that.

    Best wishes,

    1. Thanks. I like Interserve a great deal (as you may have guessed). It is one of the most solid companies I have encountered which is trading at such a low P/E. Very appealing.

      Of course, I wish I had waited one more day. Today they have dropped about 2% to about 596. I am happy with my purchase price. But that would have been nicer. As is often the case with IRV I can't quite work out why they have dropped so heavily!

      That is what I found with regards the dividend growth record. It was the stock split which confused the issue! Whatever the case, it is a very good dividend record and one looking set to continue for the near future at least!

  2. Just added Interserve to my watch/to buy list, so I could get some over the next few months. Thanks for doing the detailed analysis on the company!

    1. My pleasure! Glad you found it of use. It is definitely a company worth looking into. It seems so strong all round!

      As always, there is the classic Do Your Own Research health warning. If you do find anything interesting or worrying do drop me a comment. I am always willing to be proven wrong!

      I look forward to possibly seeing you join me in the IRV shareholder list!