One of the things I like about investing in FTSE 100 companies is the income prospects they offer me.
This month, a FTSE 100 share in my portfolio raised its annual dividend 6.5%. Not only that, but this was the 29th year in a row the annual payout had grown. Yet its share price today is substantially cheaper than it was five years ago!
If I had spare money to invest today, I would happily snap up more of its shares for my portfolio.
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Serial dividend raiser
The company in question is DCC (LSE: DCC). The name might not be familiar despite the business being a FTSE 100 enterprise.
It has a conglomerate structure, meaning it operates under a variety of different brands. Many of these are in its energy business. DCC is one of the leading suppliers of bottled gas in multiple markets. But it also operates a healthcare business and is active in the technology field.
Energy represents the lion’s share of DCC’s business. Last year, the division accounted for 70% of the company’s total adjusted operating profits of £656m.
Given the high energy prices seen last year, its strong performance came as no surprise. But does its focus on energy involve the risk of a dividend cut as gas prices fall?
Strong business model
I do see a risk. After all, no dividend is ever guaranteed – and past performance is not necessarily an indicator of future success.
Still, DCC’s business model has been proven over decades, including multiple energy market cycles.
Last year’s dividend of £1.87 per share was more than covered by earnings. Adjusted earnings were £4.56 per share, while basic earnings came in at £3.38 per share.
On a free cash flow basis too, the dividend was comfortably covered. Free cash flow for the year came in at £570m. Paying dividends cost the FTSE 100 firm the far smaller sum of £178m.
With that sort of coverage, I reckon DCC could continue its long streak of annual dividend increases, even if earnings fall.
Risk environment
I do have some concerns about future earnings, as it happens. Debt has grown sharply. Net debt jumped 47% last year to £1.1bn. That figure includes lease creditors, but I still think the rapid growth in debt is a risk to profits, especially in a time of rising interest rates.
The flipside is that the company has been incurring debt to fund acquisitions. That could boost earnings potential this year and beyond.
The healthcare division has also been performing weakly, with operating profits falling 8.6% last year. But that might be due to a customer stock overhang. Once that has worked through the system, hopefully revenue growth will return. But that could take time.
I’d buy!
Despite these risks, I think the company is well-positioned and benefits from a simple but proven business model.
DCC is throwing off large free cash flows. I expect that to continue even in an environment of lower energy prices. Its bottled gas businesses often benefit from a captive market, with few sizeable competitors.
Such free cash flows can help support the dividend. As one of the FTSE 100’s Dividend Aristocrats, I like the long-term income prospects offered by holding DCC shares in my portfolio.
