- Flooring specialist adds to dividend growth streak that extends to 1974
- Higher profit margins offset weaker sales, thanks to operational efficiencies
- Net cash pile on the balance sheet continues to grow
- Macro environment weighs on shares which trade at lowest level since 2014
“A 5% drop in sales shows that the trading environment is far from easy for James Halstead but investment in more efficient manufacturing processes is already paying off in the form of higher profit margins for the flooring specialist,” says AJ Bell investment director Russ Mould.
“Increased returns on sale are, in turn, helping to fuel cash flow and it is cash flow that pays the dividend, which a 10% hike in the interim payment leaves the Bury-based firm on track to add to a growth streak in its annual shareholder distribution that goes all the way back to 1974.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to June.
“The rate of increase for the first-half dividend makes analysts’ forecasts of 5% advance in the full-year payment to 8.9p look conservative, especially as it implies a 2.5% hike in the final dividend. It also speaks loudly of management’s confidence in James Halstead’s future prospects and the robust nature of its finances.
“This is despite another difficult first half, where weak consumer confidence impacted retailers’ willingness to refurbish stores and governments reined in spending, especially in James Halstead’s European and Australian markets.
“Sales fell by 8% and 12% respectively in those arenas, while the UK, easily the company’s biggest market, came in flat, despite another notable slowdown in government spending and also wider caution ahead of the autumn Budget.
“However, management notes that spending in prisons, hospitals, schools and care homes can be delayed but not cancelled, so a backlog of business continues to build and investment in more efficient manufacturing processes at the Radcliffe and Teesside factories should leave James Halstead primed to benefit once those orders finally land. Improvements include the roll-out of LED lighting and deployment of solar panels. These changes helped to boost margins, as did a 7% reduction in overhead, with the result that the group operating margin exceeded 20%, a mark last seen on an annual basis in 2016.
Source: Company accounts. Financial year to June.
“Such lofty margins can lead to healthy cash flow and therefore add to the liquidity which already buttresses the company balance sheet, which shows £64 million of cash and no debt, lease obligations of just £5.8 million and a modest pension deficit of just £0.6 million.
“Such robust finances should see James Halstead through any economic squall and feast upon any weakness among its rivals, while also giving management the opportunity to reward patient shareholders for their support.
Source: Company accounts. Financial year to June.
“Steady increases in the dividend over time should, in the end, support the share price. Worries over the macroeconomic backdrop, especially in the UK, added to general levels of disinterest in small- and mid-cap stocks and AIM’s, continue to weigh on James Halstead’s share price, which now languishes at its lowest mark since November 2014.
“The sharp falls of the last three years in particular mean that the shares now trade on around 14 times earnings and offer a 5.8% dividend yield, which is well backed by cash flow and a net cash pile. It will be interesting to see if such metrics start to catch the eye of value hunters who may also warm to how their interests will be aligned with those of executive chair Mark Halstead and the founding family, whose stake in the business will mean that the company continues to plan carefully for the long term and not take any undue risks in the near term.
Source: LSEG Refinitiv data
“In the financial year to June 2015, when the shares last traded around 150p, James Halstead recorded an annual net profit of £34 million and paid a dividend of 5p a share, compared to the £44 million and 8.9p respectively that analysts expect for the year to June 2025.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts
