The reaction to first-half results from Smiths Group (LSE: SMIN) on Friday reminded me how markets are so often driven by short-term sentiment.
A fall of 12% in pre-tax profit led to a 10% drop in the share price in morning trading, though looking more closely at the figures I really don’t see it as any great long-term concern. The integration of Morpho Detection coupled with increased R&D spend look like they’re partly behind the drop.
And though revenue declined by 4%, the firm did take a £49m hit from adverse currency movements, and it’s been a year with four divestments along with that acquisition.
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Citing strong order books at John Crane and Smiths Detection and “the substantial ongoing programme of new product launches in Smiths Medical,” the firm reckons that its “growth rate will accelerate over the balance of the year.“
Buying opportunity
In this kind of international engineering business where things move in multi-year cycles, short-term variability like this doesn’t mean much to me. And I think share price drops present better buying opportunities.
I wasn’t surprised to learn that ISA millionaires typically invest in blue-chip stocks offering progressive dividends, and I think Smiths Group presents the ideal candidate to join them as a long-term ISA investment.
Dividend yields have been coming in at around 3%, which is close to the FTSE 100‘s long-term average. That’s good enough, but more importantly they possess two key characteristics. They’re well covered by earnings — more than 2.25 times last year. And they’re keeping ahead of inflation — last year’s rose by 3%, and there’s a 3.3% increase pencilled in for this year.
Another ISA star?
I see another tempting ISA candidate in Kingfisher (LSE: KGF), in similar circumstances. The owner of B&Q and Screwfix saw its shares shed 10% on Wednesday, after full-year results revealed an 8.1% drop in pre-tax profit.
That was expected, but the firm reported only a very modest 1.5% fall in underlying EPS, ahead of expectations. And the dividend was hiked by 4% to 10.8p per share, for a yield of 3.7%.
For a long-term ISA investment, cash health is key to me, and on that score I rate Kingfisher highly. On the surface, it might not look that way, as the company reported a drop in net cash from £641m to just £64m.
Returning cash
But as part of its five-year transformation plan, it’s been in a phase of returning excess capital to shareholders. The year saw £491m returned, with £231m by way of dividends and £260m going on a share buyback programme. Building higher levels of stock to improve product availability also consumed some net cash, but overall, I see Kingfisher’s balance sheet as providing a healthy base for future performance.
And again, we have those two key factors I like to see in an ISA candidate. Kingfisher’s dividends are covered twice by earnings, which suggests they’ll be resilient through times of earnings dips — as we’ve just seen for 2017. And they’re growing ahead of inflation, with this year’s 4% rise following on from 3% last year, and forecasts suggest an 8% boost in the current year.
If you stash these two in an ISA and reinvest your annual dividend cash, I reckon you’ll do well.
