Getting Constructive

12/09/2009 12:01 am EST


Douglas Moffitt

Editor-in-Chief, Successful Personal Investing

UK infrastructure builder Balfour Beatty combines a decent yield with a track record of profitable growth, writes Douglas Moffitt in The IRS Report.

Balfour Beatty (LSE: BBY) is a name which will be familiar to anyone who has passed a [UK] building site or driven on a motorway under maintenance. [The engineering and construction company] should be a major beneficiary from government public spending programmes on both sides of the Atlantic, the effects of which have not yet had time to show through in corporate profits.

Balfour Beatty describes [itself] as an “international engineering and construction services, facilities management, professional services and investment group” specialising in infrastructure markets and the public sector and regulated utilities, which includes railways in the UK and EU. It says these core skills are concentrated in the three areas which span the infrastructure project life cycle.

The record since 2000 is impressive. Sales then were £2.6 billion, pretax profits £86 million, and the 4.5-pence dividend was covered less than 2.5x by earnings. The comparable 2008 figures are sales of £9.4 billion, profits of £249 million, and a 12.8-pence dividend covered more than three times by earnings.

Cash generation regularly exceeds profits: average cash last year was over £200 million. The company did have a near-£600-million pension fund deficit at the last count, but is taking action both to fund some of the deficit and to reduce future pension benefits. At the halfway stage this year, profits and earnings were all up, and the interim dividend was raised by 5.5%.

The company has [recently] completed a £350-million rights issue at 180 pence a share to help fund an acquisition in the US to expand its existing business there, already accounting for around a third of group sales.

[It] is not entirely clear what shareholders will get in the immediate future. The company reaffirms that it intends to maintain the historic policy of growing dividends “broadly in line with the growth in earnings,” but then goes on to say that the acquisition and rights issue will be “modestly dilutive” to earnings in 2010, but earnings-enhancing from 2011, and that future dividends “shall take account of the bonus element of the rights issue”.

Frankly, this could mean anything. Before the rights issue, the shares were yielding a touch over 4%, and I am assuming a full- year pay-out of at least 11.8 pence a share for our first full year, which also seems to conform with the market’s post-rights valuation of the shares. The maiden payment will be next July. [Shares closed at 245.20 pence in London Wednesday—Editor.]

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