Have £1,000 to invest? Here’s why I think this FTSE 250 dividend stock could be about to take off
It has been a rough ride for shareholders of temporary power solutions business Aggreko(LSE: AGK) over the past five years. According to my calculations, during this period the stock has produced a total return for investors of -8.6% per annum.
However, shareholders who’ve been sitting on their holdings for the past 15 years have seen a total annualised return of 14%. That’s nearly double the market average.
And after several years of floundering, I believe there’s a strong chance Aggreko’s performance could be about to pick up again.
Balancing the books
Around 50% of Aggreko’s revenue comes from its Rental Solutions business, which provides long-term services to industrial and utility customers around the world. The oil and gas industry is a crucial customer for this division, and as activity in this industry has picked up over the past 12 months, revenues have started expanding again.
According to a trading update published by the company today, Rental Solutions “underlying revenue increased 26% on the prior year, and 24% excluding hurricane-related work in North America.” As this is the largest division, the expansion is having a disproportionate impact on overall group sales. Underlying revenue for the nine months ending 30 September is on track to grow 11%.
Unfortunately, foreign currency headwinds and rising fuel costs mean Aggreko’s profit before tax will remain at 2017’s level in 2018. Still, for a company that has registered five consecutive years of year-on-year declines in net profit, this is a big positive.
In fact, this turnaround indicates to me that Aggreko is finally on the verge of a comeback. Double-digit revenue growth is a huge positive for the group and puts the business on track to return to growth in 2019, as City figures currently suggest (analysts have pencilled in earnings per share (EPS) growth of 7% for next year).
Dividend potential
A return to growth also bodes well for the company’s dividend potential. One of Aggreko’s best qualities is its dividend credentials.
Even though earnings have slumped over the past five years as demand for temporary power solutions from the oil and gas sector has evaporated, management has maintained the group’s distribution to investors. It’s been able to do this because the payout has always been set at a conservative level. Indeed, dividend cover only recently dropped to 1.5 times EPS.
As earnings recover, forecasts suggest cover will move back to 2 times earnings. This extra headroom will give management the financial flexibility to restart payout growth. And when Aggreko’s dividend starts to grow again, I think the stock could take off.
A sign to investors
By announcing the first dividend increase for many years, management will send a strong signal to the market that it believes the company’s turnaround is complete, and I think this will be enough to convince investors to return.
So overall, as Aggreko’s turnaround nears its end, I think time could be running out for investors to buy the shares and profit from the recovery.
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Rupert Hargreaves owns no share 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.
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