When holding dividend shares for passive income, a constant risk is that companies will cut their payouts. From tough trading conditions to cash flow problems, there are all sorts of reasons that even the biggest firms cut their dividends sometimes. But one UK dividend share has just announced a double-digit percentage increase in its annual payout. Not only that, the increase marks the 54th year in a row that this company has raised its dividend!
Engineering specialist
The company in question is engineering specialist Spirax-Sarco (LSE: SPX). The company is not a household name, but that is partly because its customer base is commercial.
There is a lot to like about the business model at Spirax-Sarco, in my view. Many of its products are needed for time-critical situations where quality matters, for example replacing a broken part that has caused a production line to stop. So customers are willing to pay premium prices. That can help sustain high profit margins for the company. Last year its post-tax profit margin was 17%.
The company benefits from deep relationships with many customers due to its ability to tailor bespoke solutions for specific needs. That helps build customer loyalty, which in turn should help boost future revenues.
One risk, though, is any cutback in spending by customers if there is a recession. Although some of Spirax-Sarco’s output is essential whatever the economic situation, not all of it is. I think a bad recession could hurt both revenues and profits.
UK dividend share with long track record
The company announced its annual results yesterday, and said it plans to raise its annual dividend by 15%. That is the fourth time in five years that the company has increased its payout by double-digits in percentage terms.
That level of dividend growth would catch my attention at any company. But what is incredible is that Spirax-Sarco has raised its dividend every year on the trot for more than half a century. That is an incredible record and very unusual among UK shares. It is particularly noteworthy given that the recent increases are substantial ones and not just tokenistic efforts to maintain this record.
With the latest dividend covered two-and-a-half times by earnings, the dividend increase looks well supported to me. As with any company, there is no guarantee that the company will keep increasing (or even paying) its dividends in future. However, I would be surprised if management did not at least try to keep the increases coming.
Spirax-Sarco dividend yield
So far, so good – this UK dividend share could easily slot right into my income portfolio if I could buy it at an attractive price.
But other investors also like the income story here. So the shares are not cheap. The Spirax-Sarco share price means that its current dividend yield is only 1.2%, which does not excite me much. The shares have fallen 15% since November but are basically flat over the past year, growing less than 1%. With a price-to-earnings ratio of 35 they look cheaper than before. But they are still too pricey for my tastes, even for such a high-quality company. So for now, I will not be adding Spirax-Sarco to my portfolio.
Christopher Ruane has no position in any of the shares 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.
