Why I'd dump Carillion plc to buy this stock
Shares in Mears Group(LSE: MER) dropped just over 9% this morning on the release of the firm's interim results but are bouncing back as I write.
The company is a social housing repair and maintenance services specialist but also has a care division, builds new social housing, and provides estate and housing management services. I reckon the market was spooked because the firm says it now expects its housing division revenues to come in 3.6% down on original expectations for 2017, at £800m, which will lead to "a resulting loss of profit and lower overhead recovery." The housing division accounts for around 85% of the firm's revenue so the news is significant.
Mears expects its clients to delay planned works orders this year because their focus has diverted following the Grenfell Tower tragedy. Social housing providers are concentrating on ensuring their housing portfolios are safe and fully compliant following the shortfalls revealed at Grenfell Tower. But delays in procurement decisions should be temporary as much of the work is already contracted. The directors reassure us that the housing division order book remains unaffected.
A steady business
Today's half-year results are in line with management's previous expectations with revenue up 1% compared to a year ago and normalised diluted earnings per share rising by 3%. In a sign of their ongoing confidence in the outlook, the directors pushed up the interim dividend by 5%.
Despite the anticipated temporary setback in revenue, I like Mears because the firm's operations strike me as having a big defensive element to them. I think the steady nature of the business shows up in the company's dividend record where the payout has increased by just over 46% over the past four years and is rising again going forward.
I'd certainly rather buy shares in Mears than in troubled construction and civil engineering contractor Carillion(LSE: CLLN). The firm's car-crash July trading statement was arguably a long time in its gestation and we may well have seen it coming by examining the company's record on dividends.
Over the same four-year period that Mears raised its dividend by 46%, Carillion's payout grew just 7%. The firm was struggling to raise its dividend and has now chosen to not pay one at all by suspending 2017 dividend payments. With debts rising, cash flows shrinking and contract wins coming in below expectations, Carillion is embroiled in a major restructuring exercise that involves exiting several of its previous markets.
On top of that, it is possible the firm may approach the market for further funds to shore up its balance sheet and an announcement on the outcome of a review regarding its capital structure is due with the interim results in September. I certainly wouldn't want to be holding the shares with that hanging over my head.
I reckon a firm's dividend record and the directors' ongoing decisions about the dividend can tell us much about the underlying health of a business and its outlook. Based on that theory, and what I'm seeing from these two companies, Mears wins hands down.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.