Galliford boosts dividends as earnings surge

Good news for shareholders of Galliford Try (GFRD), which said it would boost its final dividend by a third in its full-year results after earnings per share leapt 50 per cent. The payment would take its full dividend for the year to 22.5p a share, including a 12p special, giving it a hard-to-beat yield of over 10 per cent. The construction company said its focus on public sector-funded projects, which account for around 90 per cent of its revenue, allowed it to grow profits despite the wider real estate downturn.

Chief executive Bill Hocking added: "Our high-quality order book provides visibility and security of future workloads. Our business is not exposed to the short-term economic cycle as our sectors are critical to the UK's future growth."

The order book grew to £3.7bn from £3.4bn at the 2022 year-end, giving the company “increased confidence” that its pre-exceptional profit before tax for the current year could hit the “upper end” of analyst estimates, which would mean growth of 28 per cent to £28mn. And, when the real estate sector recovers as experts predict it will next year, Galliford will be well placed to take on those more cyclical, private sector projects in addition to its public sector work.

However, there are bear points for Galliford. First, its 2.3 per cent operating margin is still wafer thin. While this is par for the course for construction companies, the fact it is the same as last year’s operating margin raises some questions about its ability to get it to 3 per cent by 2026. The forward order book does help with the certainty of that target, but investors should still keep an eye on it.

Secondly, its full-year dividend is not covered by earnings. A large part of this is due to a one-off dividend payment following the settlement of a “complex and challenging” dispute with a major infrastructure fund, which it did not name.

Shareholders will have been glad to receive the dividend, but they should not expect the company to be quite so generous next year, not while it targets a dividend cover of 1.8 times by 2026. Still, investors should be confident Galliford will meet that target due to the visibility of its earnings created by its forward order book. This visibility should also give investors confidence their regular dividend payments will continue to rise.

Galliford’s price-to-earnings ratio may look expensive on an IFRS basis, but quality comes at a price, and FactSet consensus gives adjusted EPS of 19.95p a share, implying a PE ratio of 11 times. The baked-in nature of its future earnings continues to make this stock appealing to us. Buy.

Last IC view: Buy, 178p, 08 Mar 2023