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Babcock's double-digit dividend hike

RESULT: Babcock shares retreat from record highs as the engineering outsourcing group announces another solid set of results and a tasty 11 per cent dividend hike, but after a heady run all the good news is in the price.
November 6, 2012

Engineering outsourcing group Babcock International (BAB) is in a strong position with around 90 per cent of this year's revenues secured and operating profit margins rising 70 basis points to 11.2 per cent in the first half. This helped drive underlying pre-tax profits up 13.3 per cent to £143m, and with cash generation strong, around £60m of borrowings have been paid down. Shareholders have been rewarded, too, after the board announced a double-digit interim dividend hike.

IC TIP: Hold at 953p

Babcock's order book declined from £13bn at the start of the year to £12.5bn, but chief executive Peter Rogers remains confident on prospects for his business as the bid pipeline rose sharply, up from £9.5bn to £13bn in the same period, including bids to manage the Ministry of Defence's estate. Outsourcing is a fast-growing area and Babcock's support services division reported revenues 18 per cent higher at £454m, buoyed by contract wins with the London Fire Brigade (training), Devon County Council (schools effectiveness programme), and at the Dounreay nuclear site (decommissioning). True, new contracts meant divisional margins slipped 0.5 percentage points to 9.3 per cent, but operating profits still rose 11 per cent to £42.1m.

Broker Panmure Gordon forecasts full-year adjusted EPS of 70p (from 61.2p in 2012), rising to 78.4p in the 12 months to March 2014.

BABCOCK INTERNATIONAL (BAB)

ORD PRICE:953pMARKET VALUE:£3.4bn
TOUCH:952-953p12-MONTH HIGH:997pLOW: 660p
DIVIDEND YIELD:2.4%PE RATIO:20
NET ASSET VALUE:235p*NET DEBT:67%

Half-year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20111.477819.65.7
20121.5610224.76.3
% change+6+31+26+11

Ex-div: 12 Dec

Payment: 11 Jan

*Includes intangible assets of £1.9bn, or 517p a share