Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
Intertek’s paltry dividend yield means it is likely to be instantly dismissed as a potential income holding by most investors. Indeed, the provider of testing, assurance and inspection services has a historical income return of just 2.1pc – this is around 130 basis points lower than the FTSE 100 index’s dividend yield.
However, the company is in the midst of implementing material change to its dividend policy. While it paid out 50pc of its profits to investors in the 2023 financial year, this figure is expected to rise to 65pc from the 2024 financial year onwards. As a result, its latest interim dividend rose by 43pc on a per share basis.
The company is set to release full-year results next month. If current expectations for earnings are met, with its latest trading update stating that its financial guidance remained unchanged, the company’s dividend yield for the 2024 financial year should amount to roughly 2.9pc.
Clearly, this is still 50 basis points below the FTSE 100 index’s yield. However, Intertek has an excellent track record of earnings growth that could mean its dividends are more likely to rise at a rapid rate in future.
In fact, its bottom line has grown at an annualised rate of 9pc over the past three years. Given that the company is forecast to match that rate of earnings growth in 2025, its dividends are likely to rise at a pace that is significantly ahead of inflation.
The company’s latest trading update further showed that, alongside like-for-like revenue growth of 6.3pc, it was able to grow profit margins in the first three quarters of its financial year. This was achieved through a mixture of cost reductions, price increases and improved productivity, which suggests it has a sustainable competitive advantage. With Intertek continuing to skew investment towards higher-margin market segments, its financial outlook and dividend prospects are upbeat.
Intertek also has a sound financial position through which to pursue acquisitions to bolster its bottom-line growth rate. At the time of its half-year results, for example, its net debt-to-equity ratio was 74pc; net interest cover in the first six months of the 2024 financial year, meanwhile, was in excess of 11. This has enabled it to make three acquisitions in the past two years and leaves it well-placed to conduct further M&A activity in future.
Having risen by 31pc and outperformed the FTSE 100 by 20 percentage points since our original “buy” recommendation in April 2023, the company’s shares now trade on a relatively rich market valuation. Using current forecasts for the 2024 financial year, for example, the stock has a forward price-to-earnings ratio of around 22.