High dividend yields continue to attract investors to the big London-listed banks and Lloyds Banking Group is one of the most popular. But it doesn’t attract me. When I look at Lloyds I see a highly cyclical outfit dependent on the financial health of its customer-businesses and individuals for its prosperity.
But the clock is ticking, and I wouldn’t want to be caught holding shares in Lloyds when the next meaningful general economic downturn arrives. It seems to me the shares have been marking time for years, perhaps waiting for the next economic shock.
A transformed outlook
By contrast, Avon Rubber (LSE: AVON) has been a rip-roaring success for its shareholders with an almost 180% increase in the share price over the past five years and a more-than 270% rise in the dividend over the same period. But I reckon there could be more to come from the company – perhaps much more.
The firm describes itself as an “innovative” technology group which designs and produces specialist products and services to “maximise” the performance and capabilities of its customers. It specialises in chemical, biological, radiological, nuclear and respiratory protection systems, as well as cow-milking-point solutions. An odd combination, perhaps, but the common theme is rubber, and operations appear to have expanded from that starting point.
Today’s full-year results report shouts about “a transformed outlook.” And chief executive Paul McDonald explains in its pages that the results are “ahead of expectations.” The firm announced around $340m of long-term contracts during the period as well as agreeing the terms of a $91m acquisition of 3M’s ballistic protection business, which is expected to complete in the first half of the current trading year.
McDonald said the acquisition will “significantly” boost its personal protection offering and “accelerate” Avon Rubber’s long-term growth prospects. Meanwhile, he reckons a “strong” order book worth around £40m provides “confidence” for 2020.
Investing for growth
Avon Rubber has been shaping up as a decent growth company and the new acquisition could prove to be a catalyst for further operational advances in the years to come. But the company’s success is no secret, and we can see that in the valuation. With the share price close to 1,900p, the forward-looking earnings multiple for the current trading year to September 2020 is almost 23. Meanwhile, the anticipated dividend yield sits at just over 1.4%.
But City analysts think the dividend will grow at 30% in the current year and the payment will be covered more than three times by estimated earnings. The directors could halve the cover from earnings and double the yield if they want to. But the fact that they are holding cash in the business leads me to believe they see plenty of opportunities to invest in further growth. Today, I’d much rather own shares in Avon Rubber than in Lloyds Banking Group.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Avon Rubber and Lloyds Banking Group. 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.
Motley Fool UK 2019