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    Home»Stock Market»Income investors should consider this new trick – a low-yielding stock
    Stock Market

    Income investors should consider this new trick – a low-yielding stock

    February 13, 20254 Mins Read


    London financial district
    London financial district

    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.

    While this suggests it provides a relatively limited margin of safety even at a time when the FTSE 100 trades close to a record high, Intertek’s aforementioned high single-digit forecast earnings growth rate for 2025 indicates that it still offers good value for money. As a result, it could produce attractive capital gains to complement its income return.

    Intertek’s exposure to fast-growing economies, meanwhile, bodes well for its longer-term financial performance. The US, for example, is its largest market, accounting for more than 30pc of sales in 2023. Given the US economy is growing at a relatively fast pace even without the full impact of monetary policy easing taking effect, the company could experience improved operating conditions that catalyse its profitability and dividend growth.

    As a result, the stock becomes the latest addition to our income portfolio. Its notional purchase will be funded partly by existing cash from previous sales, as well as from the exits of Baronsmead Venture Trust and Northern Venture Trust from the portfolio. They have posted capital losses of 42pc and 23pc, respectively, since being added to the portfolio in October 2016.

    In Questor’s view, Intertek’s solid financial position, sustainable competitive advantage and upbeat earnings growth forecasts mean it offers a favourable risk/reward opportunity. Plans to increase its payout ratio mean its income appeal has materially improved over recent months, with positive real-terms dividend growth set to be delivered over the coming years.

    Questor says: buy
    Ticker: ITRK
    Share price at close: £53.10

    Read the latest Questor column on telegraph.co.uk every weekday at 5am. Read Questor’s rules of investment before you follow our tips.

    Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.



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