Babcock: A FTSE 100 Dividend-Raising Star

LONDON -- In an outcome that's tough on investors, the FTSE 100 (INDEX: ^FTSE  ) has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF (LSE: ISF.L  ) , for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year

2007

2008

2009

2010

2011

Dividend per share (pence)

19.1

20.2

17.1

16.2

18.1

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Babcock International Group (LSE: BAB.L  ) .

The big question is whether Babcock's dividend can continue to outperform its index. Let's put the firm under scrutiny and test its financial mettle.

Babcock is a support services company working for public and private sector organizations. With the shares at 890 pence, the market cap is 3.2 billion pounds. This table summarizes the company's recent financial performance:

Trading year

2007

2008

2009

2010

2011

Revenue (million pounds)

1,556

1,902

1,896

2,565

2,848

Net cash from operations (million pounds)

89

117

150

239

196

Adjusted earnings per share (pence)

33.4

41.9

51.37

52.5

61.47

Dividend per share (pence)

11.5

14.4

17.6

19.4

22.7

So, the dividend has increased by 97% during the last five years -- equivalent to an 18.5% compound annual growth rate.

Babcock describes itself as "the UK's leading engineering support services organisation" and generated revenue of about 3 billion pounds in 2012. Looking forward, there's an order book worth around 13 billion pounds.

The firm employs over 25,000 people in sectors like defense, energy, telecommunications, transport and education, doing things such as managing assets and infrastructure, delivering projects and programs, and engineering.

Currently, the firm derives around 36% of revenue from support services, 35% from marine and technology, 20% from defense and security and 9% from international operations. It's good business, which the company manages to turn into torrents of cash flow -- perfect for sustaining a progressive dividend policy.

Babcock's dividend growth score
I analyse four different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: Both earnings and free cash covered the last dividend more than twice. 4/5

2. Net cash or debt: Net gearing is around 102% with 5.6 times interest cover. 3/5

3. Cash flow: Cash flow supports profits with both trending up. 5/5

4. Outlook and recent trading: Both are robustly positive. 5/5

Overall, I score Babcock 17 out of 20, which encourages me to believe the firm's dividend can continue to outpace dividends from the FTSE 100.

Foolish summary
Although the debt is quite high, cash flow is strong and there's ample interest cover. The positive outlook is encouraging.

Right now, the forecast full-year dividend for Babcock is 25.06 pence per share, which supports a possible income of 2.8%. At that level, the firm can stay on my watchlist for now.

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Further investment opportunities:

Kevin Godbold does not own any shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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