Smiths Group Joins the Bandwagon of Dividend Payers

Summary

• In the present circumstances when the companies are cutting dividends there are some companies which have declared dividend despite a fall in their revenues or profits
• Smiths Group Plc had scrapped a planned payment earlier; now it has become the tenth FTSE 100 firm to declare dividend
• Recently, apart from Smiths Group, Volta Finance Limited and Crown Place VCT PLC have also declared their dividends

The Covid-19 pandemic poses an unprecedented threat to the global economy, followed by the economic downturn. Different strategies and tactics are being adopted by nations worldwide, ranging from lockdowns, strict quarantine, severe restrictions on international and domestic travel, work from home etc. All these have brought business virtually to a halt. Many businesses which were paying dividends to its shareholders are cutting their pay-outs. Since it reduces the source of income, a dividend cut announcement is definitely not good news for investors.

In the present scenario, when the companies are cutting dividends, there are some who have declared a dividend in spite of a fall in their revenues or profits. One such which has been in the news recently is Smiths Group PLC. On 24 September 2020, industrial conglomerate Smiths Group released its annual report for the period ending 31 July 2020. Though the company had a disrupted second half because of the pandemic, it was successful in announcing a total dividend of 35 pence.

Though the company had scrapped a planned payment earlier, it became the tenth FTSE 100 firm to declare a dividend. However, the investors do not seem overly impressed with the Group’s full-year results. Despite a significant market disruption, the company’s performance was robust. The business continued to provide exemplary service to its customers.

Let’s dive deep into the financial highlights of the company:

• Revenue- The Group recorded a decrease in the underlying revenue for continuing operations, which was down (1) per cent, comprising 3 per cent increase in H1 2020 and (4) per cent decrease in H2 2020. Smiths Group recorded a surge of 2 per cent in the reported revenue to £2,548 million (FY2019: £2,498 million), including £15 million of favourable foreign exchange translation and £61 million from the acquisition of United Flexible. The overall performance of the Group is driven by a high proportion of aftermarket revenues and its market-leading positions.
• Operating profit and margin- Lower volumes in H2 2020 resulted in the underlying headline operating profit to declining by 13 per cent. Additional costs were also incurred in order to support business continuity and uninterrupted customer service during the pandemic. The reported headline operating profit was £327 million (FY2019: £427 million), declining by 23 per cent.
• The Group also witnessed a decrease in the headline operating margin of 210 bps to 15.0 per cent on an underlying basis and 430 bps on a reported basis, resulting from the impact of restructuring and write-downs.
• Finance costs- The headline finance costs incurred by the Group was of £49 million (FY2019: £51 million), reflecting the impact of early repayment of higher coupon debt in the previous year.
• Taxation- The headline tax charge for the year was £79 million (FY2019: £103 million), representing an effective rate of 28 per cent (FY2019: 27 per cent). The Total Group headline effective tax rate was 26 per cent (FY2019: 26 per cent).
• Total profit and EPS- The Group saw a decrease in total headline profit after tax by 12 per cent on a reported basis. Also, the headline basic EPS was down by 12 per cent on an underlying basis and reported basis. There was an increase in total statutory profit after tax by 18 per cent to £267 million (FY2019: £227 million), driven by lower non-headline items. EPS on statutory basis was also up 18 per cent to 66.9 pence (FY2019: 56.8 pence).
• Cash-flow- The headline operating cash-flow recorded by the Group was £575 million (FY2019: £474 million).
• Debt- The Group’s net debt was £1,141 million as at 31 July 2020, witnessing a decrease of £56 million in the period.
• Dividend- The Group maintains a progressive dividend policy, recommending a total dividend of 35.0 pence per share for the year, which included a delayed interim dividend of 11.0 pence and a recommended final dividend of 24.0 pence.

Stock Performance

Smiths Group PLC (LON: SMIN) stocks were trading at GBX 1,301.50 on 25 September 2020 at 11:35 AM, down by 1.74 per cent from its previous close of GBX 1,324.50. The 52-week low/high price was reported to be GBX 814.60/1,769.50. It had a market capitalisation (Mcap) of £5,248.99 million. The company recorded a negative return on price, which was 23.26 per cent on YTD (Year to Date) basis.

Apart from Smiths Group PLC, there are some other companies which have recently declared dividend. Below are the few of them:

Volta Finance Limited

The company announced an interim dividend (3^rd one) for the financial year beginning 1 August 2019. As per the announcement made by the company, €0.11 per share a quarterly dividend (interim) has been declared and is payable by the company on 29 October 2020 amounting to approximately €4.24 million.

Stock Performance

Volta Finance Limited (LON:VTA) stocks were at EUR 4.30 on 25 September 2020. The 52-week low/high price was reported to be EUR 3.38/6.74. It had a market capitalisation (Mcap) of £144.00 million. The company recorded a negative return on price, which was 34.05 per cent on YTD (Year to Date) basis.

Crown Place VCT PLC

In the annual financial result of the company released on 24 September 2020, a first interim dividend of 0.83 pence per share (29 November 2019: 1 penny per share) was announced for the year ending 30 June 2021. The dividend will be payable to its shareholders on 30 November 2020.

Stock Performance

Crown Place VCT PLC (LON:CRWN) stocks last traded at GBX 32.00 on 25 September 2020. The 52-week low/high price was reported to be GBX 29.50/33.70. It had a market capitalisation (Mcap) of £63.03 million. The company recorded a negative return on price, which was 2.14 per cent on YTD (Year to Date) basis.

Factors an Investor Should Focus to Avoid Dividend Disappointments

An investor must focus on the following metrics to track the dividend-paying companies:

1. Dividend Payout Ratio- Lower the payout ratio, better it is as it allows for a better margin of safety on the dividend stream from earnings.
2. Earnings Per Share- Earnings per share should be stable and growing. Though there might be fluctuations in earnings per share because of the economic cycle, rising earnings leads to increase in the future dividend.
3. Business model- Companies possessing strong earnings and revenue streams are less sensitive to the economic cycles. Hence, they can afford to pay dividends no matter what, therefore, a company needs to have a diversified business model.
4. Debt and acquisitions

To sum up, the global shutdown has posed a challenge for the payment of dividends. However, some of the companies who were not even making profits, have proposed dividend for their shareholders. But investors should be vigilant and need to have the above strategy to beat the dividend disappointments.