Join our community of smart investors

Smiths for income

A recent flow of positive news suggests Smiths' downtrodden shares may have reached a turning point.
December 17, 2015

A much-needed pension shake-up and better trading prospects across some of its core divisions suggest Smiths' (SMIN) prospects could be turning up as its new boss gets to work. Shares in the sprawling engineering conglomerate have tanked in the past two years, as difficult end markets and a big pension deficit proved hard to manage. But with these issues now easing - and the shares languishing on a forward PE multiple of 11 times - the high-yielding maker of everything from industrial valves to X-ray scanners suddenly looks attractive and raises prospects that a long-mooted break-up could finally be in prospect.

IC TIP: Buy at 930p
Tip style
Income
Risk rating
High
Timescale
Medium Term
Bull points
  • Pension deficit headache cleared up
  • Decent dividend now secure and expected to grow
  • Break-up potential re-emerges
  • Better trading prospects
Bear points
  • Profit machine John Crane hit by depressed oil price
  • US economy uncertainty

News that Smiths has tidied up its retirement obligations represents a major breakthrough which has turned us from sellers of the stock to buyers. A recent valuation of the engineer's UK scheme put the group's actuarial deficit at £285m, down £250m since the last valuation in 2012. This means annual contributions will fall from £60m to £24m by 2017, freeing up £36m of free cash flow a year, which compares with free cash flow of £158m in 2015.

This is subscriber only content
Start your trial to keep reading
PRINT AND DIGITAL trial

Get 12 weeks for £12
  • Essential access to the website and app
  • Magazine delivered every week
  • Investment ideas, tools and analysis
Have an account? Sign in