Halma (HLMAF, HLMLY, HALMY) is an alarms specialist with a stellar dividend record which is set to continue. The dividend payment record makes it highly attractive, and share price growth has also been very attractive for a number of years. However, the actual yield is fairly low, and I think the share price is valued far over fundamentals because of the dividend record. Although the dividend record is attractive and highly unusual, that does not make this a good investment at current price levels.
Halma: A Growing Alarms Group with a Global Footprint
Halma is basically a group of companies offering a range of safety solutions in the fields of process safety, infrastructure safety, environmental and analysis, and medical. It has 43 operating companies spread across the U.K., Europe, North America and Asia. The company is highly acquisitive with multiple acquisitions per year, which is a key driver for its continued growth.
The company has consistently grown revenue and profits in recent years, although it did recently warn that COVID-19 is likely to affect the coming year’s business results.
Source: Company 2020 annual report
The markets in which it operates – fire alarms, safety alarms, vital sign monitors and the like – are mission-critical and close to recession-proof. Coupled with the company’s talented management team, acquisition strategy and hunger for growth, it looks set to continue to grow revenues and earnings in coming years.
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Halma Is a Reliable Dividend Payer
One of the key attractions to Halma that has had investors piling into it, in my opinion, is its unbroken record of dividend growth. The company’s most recent full-year increase was the forty-first consecutive year of dividend increases of at least five per cent. In fact, in four out of the past five years, the dividend growth per annum has been over 7%.
That is an enviable record, but it gets better. Dividend cover has been increasing, and most recently stood at 3.5x. So, the dividend growth has come about from a growing earnings stream. Thus, while recent headlines such as “Halma increases dividend despite profit warning” may sound a bit alarming, in fact, the dividend looks as safe as houses.
Shares Look Expensive
There is no doubt about it, shareholders in Halma have benefited from substantial price appreciation. The shares sailed through the last financial crisis and have maintained a steep upwards trajectory in recent years. They gave up around a quarter of their value earlier in the year as COVID-19-related fears mounted across the markets, but have since recovered the lost ground.
Source: Google Finance
That marks a significant outperformance against key indices.
Source: Company 2020 annual report
The shares are currently trading at a P/E of around 45. The yield is 0.7%. Where would growth come from at these levels? Yes, the company has solid dividend coverage and a long history of progressive dividends, and it continues to grow revenues and earnings. But does that merit a P/E of 45? I don’t think so. We are currently in an irrational market, and as dividends have been cut left, right and centre, there is a flight to quality when it comes to dividends. But to use Shell (RDS.A) as an example, even after cutting its dividend by two thirds, Shell currently offers a yield of 4% and a single-digit P/E. Shell and Halma are in different businesses, and Halma hasn’t cut its dividend, but nonetheless, it’s a stark example of the valuation challenges in the current market. What’s worth more, a 0.7% yield which will go up every year for the next ten years or a 4% yield which could go in any direction? The answer will be different depending on one’s own considerations, but a sub-1% yield and 45 P/E ratio look expensive to me.
Directors haven’t bought any shares in the past year but have sold a lot. Those sales were tax and award related but nonetheless the trend is clear.
Source: Hargreaves Lansdown
Conclusion: Now is Not the Time to Buy Halma
Halma has one of the best records of uninterrupted dividend growth in the London stock market. However, the company’s yield is low and valuation is high. At these prices, it is a Sell.
Disclosure: I am/we are long RDS.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.