At its current yield, we could hardly describe environmental consultancy RPS as an income stock. However, it is the company's ability to increase its dividend almost remorselessly that makes the shares attractive to patient investors.
- Remorseless dividend growth
- Favourable comparison with 2011
- Shift of focus to energy and non-European markets
- Rating at the low end of its range
- Weakness in Europe
- Only for patient investors
The starting yield for buyers - 2.8 per cent on 2012's likely payout -is little to get excited about. However, holders can expect to start reaping the rewards of RPC's incredibly consistent record of dividend growth. Despite the fact that RPS’s consultancy business is fairly cyclical, the company has increased its dividend by 15 per cent or more for each of the past 18 years and it's odds on that this rate will continue for some time.
Management sets big store by the dividend-growth record, so the growth rate won't be trimmed lightly. With a sound balance sheet, improving trading prospects and dividend cover of three times forecast earnings, there is little to tempt management off course. And compounding at the rate of 15 per cent a year, the return soon adds up. In five years time, a shareholder buying at the current price would be picking up a 5.6 per cent income return and in 10 years time that return would be 11.3 per cent.
| RPS (RPS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 231p | MARKET VALUE: | £505m | |
| TOUCH: | 230-231p | 12-MONTH HIGH/LOW: | 257p | 155p |
| DIVIDEND YIELD: | 2.8% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 167p | NET DEBT: | 6% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 470 | 54.8 | 18.0 | 3.66 |
| 2009 | 444 | 48.6 | 15.8 | 4.20 |
| 2010 | 462 | 42.5 | 14.8 | 4.83 |
| 2011 | 529 | 40.5 | 13.5 | 5.56 |
| 2012* | 561 | 48.9 | 19.0 | 6.40 |
| % change | +6 | +21 | +42 | +15 |
* Brewin Dolphin forecasts (earnings not comparable with historic figures) Normal market size: 2,000 Matched Bargain Trading Beta: 0.7 | ||||
Meanwhile, there is a good chance that somewhere along the way patient investors will run into a re-rating for the shares. Currently, they are rated at 12 times forecast earnings for 2012. That's low compared with their rating at the peak of the last cycle – 31 times earnings in 2007. The cyclical nature of RPS's business means the rating tends to balloon at the same time as earnings zoom upwards, creating a bonanza for canny holders. Currently, the next peak looks a long way off, nevertheless there are good reasons to expect a strong performance from the company in 2012, which is expected to mark a return to serious organic growth.
RPS has been moving into promising markets and away from troubled ones since the credit crunch hit. It now generate two thirds of its underlying profits from energy and energy-infrastructure activities. This includes surveys for exploration companies, planning for large infrastructure projects and assessing the environmental impact of schemes. With a serious need for new infrastructure around the world and a high oil price, demand is buoyant for this type of work.
The company has also been moving away from the troubled European economies, and now generates almost two-thirds of its profits outside Europe. The shift in focus highlights the flexibility of running a people-based business, such as RPS’s, where work won in one country can often be carried out by highly-skilled consultants from another part of the world. And, while some parts of RPS’s European operations remain weak, at least the outlook appears stable.
There are other reasons to expect good things from RPS in 2012. Management has a strong record of making earnings-enhancing acquisitions. It spent £27m buying five businesses in 2011, which should boost profits this year. The company was also hit by several one-off events last year, the most significant of which were the oil spill in the Gulf of Mexico, which halted exploration activity, flooding in Australia and political unrest in North Africa and the Middle East. Of these, only political unrest should be an issue in 2012, which means comparisons with last year should be favourable.
