ii view: Smiths Group fires up the dividend again

Rising Covid-related costs have hit profits but both an interim and final dividend are now to be paid. 

Full-year results to 31 July 2020

• Revenue up 2% to £2.55 billion
• Profit for continuing ops down 26% to £241 million
• Net debt reduced by 4% to £1.14 billion
• Total dividend down 24% to 35p per share (11p + 24p)

Guidance:

• Continuing to offer no estimates given Covid outlook

Chief executive Andy Reynolds Smith said:

"The strength and flexibility we have built into the business, and the benefits of the Group's strategic positioning, underpinned a robust performance in challenging market conditions.

“We have continued to enhance the Group's strategic positioning, through execution of the restructuring programme, completion of three further bolt-on acquisitions and our unchanged commitment to separate Smiths Medical.

“We are seeing a stabilisation of recent trends; but we are not complacent and are continuing to strengthen the business to deliver sustainable outperformance in the future."

ii round-up:

Engineering company Smiths Group (LSE:SMIN) today reported a 26% drop in profits hit by increased costs under the Covid pandemic, but paid a previously omitted interim dividend of 11p per share along with a 24p final payment.

Operating profit of £241 million fell around 5% short of analysts estimates. Smiths supplies niche products to industries including oil & gas, mining, aerospace, and defence.  

Smiths shares retreated by more than 7% in UK trading and are now down by around a fifth year-to-date. Shares of automotive and aerospace engineer Melrose (LSE:MRO) have more than halved in 2020. 

Revenues across the diversified Smiths remained resilient, rising by 2% to £2.55 billion. Products generating continued aftermarket sales provide a group focus. 

A restructuring programme targeting annualised cost saving of around £70 million by 2022 is ongoing, although unfortunately does involve job losses. 

The total dividend of 35p per share and including a previously missed interim payment underlined confidence in the outlook according to management. Although in the name of prudence, was a near one quarter cut from last year’s total of 45.9p per share.  

Group access to cash and including the Bank of England’s support scheme totals £1 billion. Given the Covid clouded outlook, Smiths again offered no financial estimates for the current year ahead. 

ii view:

Working on a common operating model, the group’s businesses all share the characteristics of being well-positioned in growing markets, technology-led, asset-light and with a high proportion of aftermarket revenues. 

However, its medical business, with a focus away from industrial technology, is to be separated and given its own UK listing. But given the disruption of the pandemic, the business makes ventilators used by Covid patients, the separation has been placed on hold. 

For investors, the company is clearly exposed to virus-hit sectors such as energy and aerospace. A lack of any financial guidance for the current year suggests management caution. But the return of a dividend payment generates an income of over 2% in an era of ultra-low interest rates. Product diversity and the fact that most of its sales are made overseas also has attractions. In all, while some caution remains sensible, Smiths remains a well-managed business for the long term. 

Positives: 

• A diversity of business type, underlying customer and geographical location
• High proportion of aftermarket revenue

Negatives:

• Financial guidance still suspended                       
• Exposure to unpredictable foreign exchange movements

The average rating of stock market analysts:

Buy