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Is now a good time to buy Rotork (LON:ROR)?

13th Mar by Jack Brumby

Rotork Plc (LON:ROR) is a well-respected UK-based actuator manufacturer and flow control company that creates valves and related products are used on applications for upstream, midstream and downstream activities, including offshore and onshore production facilities, refining and processing.

For the fiscal year ended 31 December 2018, Rotork p.l.c revenues increased 8% to £695.7M and Net income before extraordinary items increased 62% to £91.7M on the back of an increase in demand for the Company's products and services due to favorable market conditions. These results sparked a surge in LON:ROR's share price, but even so, it remains cheaper than it was for most of 2018, and Stockopedia ranks it as a falling star stock.

That said, the group appears high quality and has built up a strong reputation in its niche. Rotork pays a rolling dividend of 2.07%. If this dividend is safe, it could help to signal attractive entry points in a high-quality company.

We can check dividend safety quickly by running through a few metrics.


Rotork (LON:ROR)’s dividend cover

Dividend cover is perhaps the most widely used measure of dividend health and is simply a company’s earnings per share divided by its dividend per share (EPS/DPS). Dividend cover below 1.5x earnings may indicate a danger.

  • The rolling dividend cover is based on projected dividends and earnings. Rotork’s rolling dividend cover is 1.89.
  • The historic dividend cover is, of course, based on historic dividends and earnings.

    Rotork’s trailing twelve month dividend cover is 1.78.

Rotork passes both of these checks, suggesting that the dividend could be safe.

Rotork (LON:ROR)’s balance sheet strength

An alternative way to analyse dividend safety is to focus more directly on a company’s balance sheet strength. A highly leveraged company that struggles to meet its short-term liabilities is more likely to cut its dividend than a well-financed one.

A safe level of gearing (debt to equity) on the balance sheet is generally considered to be 50 percent or less. Rotork’s gearing ratio is -8.49% - below the 50% threshold.

The current ratio (current assets / current liabilities ) assesses a company’s ability to service short term debts. A current ratio of less than one tends to be a worry. Rotork’s current ratio is 2.24 - above the 1x threshold.

Again, Rotork passes with flying colours.

Rotork (LON:ROR)’s fundamental momentum

A primary metric used by SocGen to assess dividend safety is an indicator known as the F-Score. Whereas most ratios (e.g. dividend cover) look solely at a company’s current financial state, the F-Score looks more deeply into the direction in which it’s financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Rotork’s F-Score is 8. This suggests that Rotork’s dividend is safe.

Does Rotork have enough cash?

Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Rotork generated 12 in FCF PS. This is higher than the dividend payout 5.9 and indicates that the company has generated enough FCF to sustain dividends. These tests indicate that Rotork can easily afford its current dividend - and the yield this dividend represents could be a useful element to incorporate when valuing the group's shares.

Income investing: what you need to know

For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.

As for Rotork (LON:ROR), you can find a wealth of financial data on the group's StockReport, including information on the group's past and forecast dividend payments. If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.

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