One of the research methods I use to find stocks with great longterm potential is to look at the Dividend Champions UK list. Dividend champions are companies that have paid increasing dividends for 25 or more years. Among the list are company such as Rotork, PZ Cussons and Diageo. Though companies on the UK dividend champion list may not be household names to many, they are excellent cash generative businesses as they have been able to raise their dividends in each of the last 25 years. This means that they were able to increase the dividends paid to shareholders during the most catastrophic of times such as the great recessions, the asian financial crises and the countless wars that and economic panics that have occurred throughout the world during this period. These companies have super resilient business models and belong in any long term investors portfolio; at the right valuation of course!
Cobham Plc (LSE:COB) is one of the companies that appears in the Dividend Champions List (see below). Cobham is a leading global technology company that manufactures products primarily for the defines and aerospace industries. The Cobham group is split into 4 different business, namely, Advanced Electronic Solution. Aviation Services, Communications and Connectivity and Mission services. Though the company is based in the UK, it derives the majority of its profits from the US due to its heavy focus on the defence/security industry. The company is doing well to balance its portfolio so that it doesn’t solely rely on government contracts in the defence space and it now gets 38% of its revenue from commercial sources.
Looking at some important metrics of the business, the company has a very high cash conversion rate of 78% and has a fantastic return on invested capital of 11%. The underlying earnings per share has increased by 5% this year and now stands at 19.5 per share.
After reading up on the company and deciding that it would be a great acquisition to my portfolio , I initiated a position in Cobham and bought 482 shares at a price of just under 210p (£2.10) per share. With the 2015 earnings per share figure being 19.5p, the P/E ratio of the stock at this price is just under 11. This is fantastic for a company that has paid a progressive dividend for the past 45 years!
The company currently pays a dividend of 11.18p per share and this means that I was able to bag a dividend yield of 5.3% on my shares. For the 482 shares I have bought, I am expecting to receive £54 in dividends this year. And I expect this amount to grow year on year.
True to its dividend champion status, the company has also just recently announced that it is increasing its dividend by 5% this year. This many not sound like much but when is the last time you got a pay raise at work?! Dividend champions like Cobham whom have excellent cash generative business models treat their shareholders well. They give shareholders like myself raises year after years and this enables my passive income to grow without me having to lift a finger. Aren’t dividend growth stocks wonderful!
If I had to take a very conservative estimate of 5% dividend increases a year, I am expecting to receive £56.7 in 2017, £59.5 in 2018, £62.4 in 2019, £65.52 and so on. This means that within the next 5 years, I am expecting to receive £241.42 in the form of dividends. This is 23% of my purchase price. Isn’t it wonderful that Cobham is paying me to hold their shares!
Cobham drops 20% on Rights Offer
As many people who pick stocks will tell you, the moment you pull the trigger and purchase a stock, the price usually tends to drop. This phenomenon has happened to countless investors before me and it will happen to many more in the years to come.
This morning, Cobham issued a profit warning for Q1 2016 due to sales in its commercial business not being as expected. Management also stated that there will be looks to raise £500 million via a rights issue and this more than anything sent the price cratering down to about 170p or 20% below where it was expected to open this morning.
Although the share price has crashed, I am not too worried as a long term investor. My personal view is that the fundamentals are still intact and nothing has materially changed since I bought my 482 shares last week. Even though the right issue has a major dilutive effect for shareholders that don’t take part, I still believe that Cobham is doing the right things and will remain profitable in the years to come. Besides, a rights issue is not always a bad thing as seen by the Tritax Big Box Reit rights issue I took part in.
From my point of view, the shares have gone from undervalued to even more undervalued. The market has overreacted as per usual and has pushed the share price so low that any further bad news has already been priced in. I am wary of position sizing and thus have not rushed to buy more shares at this reduced priced. Additionally, the share price has also risen during the day showing the markets overreaction. But should the share price fall further, I am ready to pounce and buy more shares in this dividend champion.
The Dividend Champions UK List
Dividend Champions are companies that have paid increasing dividends for 25 years or more. There are currently 10 dividend champions on the list. They are:
- Cobham – Aerospace and Defence Company
- City of London Investment Trust – Investment Trust
- Diageo – Beverages
- PZ Cussons – Personal Goods
- Spirax-Sarco Engineering – Industrial Engineering
- Cranswick – Food Producer
- The Merchants Trust – Investment Trust
- Spectris Group – Electronic and Electrical Equipment
- Rotork – Industrial Engineering
- Young & CO’s Brewary – Travel and Leisure.