My best passive income stocks are backed by businesses with growing cash flows and dividends.
In the FTSE 250 index, ME Group International (LSE: MEGP) ticks a lot of boxes.
For a start, with the share price near 168p (on 15 May), the forward-looking dividend yield is around 5% for the trading year to October 2025. But earnings, cash flows and dividends have been growing as the business expands.
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Meanwhile, the aggregated yield of the FTSE 250 is running near 4.2%, so ME Group is beating its index.
Strong cash flow
The company operates, sells and services instant-service vending equipment in 18 countries, mainly aimed at the consumer market.
We’re talking about things like:
- photobooths and integrated identification solutions;
- unattended laundry services and launderettes;
- digital printing kiosks;
- food service vending;
- and other vending equipment such as children’s rides, amusement machines, and business service equipment.
The multi-year record for cash flow looks stable and has been growing. That backs up the dividend payments, which have been cranking up well since 2020. However, they did stop altogether that year when the pandemic struck.
City analysts expect further advances for earnings and the dividend this year and next. Meanwhile, the share price has been responding well to the growth in the underlying business:
Growth has been both organic and via acquisitions. Diversification into new markets and technical innovation have driven a phase of expansion in the business and it looks set to continue.
A positive outlook
In February with the full-year results report, chief executive and deputy chairman Serge Crasnianski was upbeat about the outlook.
The business had delivered a year of “record” financial performance and progressed its long-term growth strategy.
Crasnianski said the laundry operations are a “key growth driver”. But there was strong revenue and earnings growth across all the firm’s business areas and geographies.
The directors expect to build on the success of 2023’s trading and achieve further progress during the current trading year.
However, the current operational momentum hasn’t arrived overnight. For many years, the company has been building long-term relationships with major site owners.
Equipment is usually placed in areas of high footfall such as supermarkets, shopping malls, transport hubs, and administration buildings. The strategy has led to the steady cash flow enjoyed by the enterprise today and for the past few years.
However, there are risks from competition and general economic shocks. For example, in 2018 the share price plunged when the company downgraded its 2019 profit guidance because of over-supply in its Japanese photo identification business.
It’s always possible for the firm to hit turbulence again given the way it’s expanding in its markets.
Nevertheless, ME Group appears to be executing the growth of its operations well for the time being. So I see it as worth deeper research with a view to considering the stock for inclusion in a diversified passive income portfolio.
