Embattled outsourcer Serco (LSE: SRP) had some good news for investors today. The company, which has been undergoing a restructuring for around three years, announced this morning that it had signed heads of terms to acquire a portfolio of “selected UK health facilities management contracts” from Carillion, for a total consideration of £50m.
Also, the company told investors today that it has spent £15m to acquire US defence engineering firm BTP Systems. The deal is set to complete “around the end of next year” while the healthcare contract is expected to be fully integrated by the end of 2018 too. The healthcare deal will produce estimated annual revenue of approximately £90m for more than a decade.
A turning point
The fact that Serco has started to do deals again marks a turning point for the struggling business. Indeed, after three years of falling profits and revenues, this year City analysts are expecting the company to report a robust recovery in pre-tax profit.
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A figure of £55m has been pencilled in, up 83% year-on-year on revenues of £3.07bn, up 2%.
I believe that this return to growth will result in a higher dividend for investors. Serco slashed its payout in 2013, from 10p per share to 2.5p before eliminating it entirely. Analysts are expecting a token distribution of 0.13p this year rising to 0.4p for 2018.
After this growth of 200%, there is scope for further payout increases as earnings continue to expand. Based on current projections, the payout will be covered 10 times by earnings per share for 2018. Historically, Serco has paid out around one-third of earnings to investors via dividends. As revenues stabilise, I expect management to re-adopt this strategy.
According to my figures, paying out one-third of earnings for 2018 would give a total dividend of 1.2p per share, up 900% from current levels.
Dividend champion
Growth at Secure Trust Bank (LSE: STB) has been nothing short of exceptional over the past five years. Revenue has expanded from £47m to an estimated £138m for this year and if the company hits City analysts’ estimates for growth, by 2018 earnings per share will have doubled in the space of seven years.
However, despite this growth, the company remains unloved by the market. The shares support a dividend yield of 4.5% and only trade at a forward P/E of 12.9, falling to 9.9 for 2018.
If the company can repeat its performance of the past five years, I believe that there’s scope for both the shares and dividend to double. Doubling earnings per share to 300p or more by 2025, and assuming the earnings multiple remained the same, would give a share price of 3,600p, a return of 10.4% per annum. This excludes and dividend payments.
Right now the company distributes 60% of earnings to investors via dividends. Some 60% of 300p would give a dividend payout of 180p per share, up 125% from current levels, providing a yield of 10% at current prices.
