Halma: a matchless record of dividends

Safety specialist Halma capped its remarkable run by entering the FTSE 100 – but more will come.

Optical filters are just one of Halma's many products

Many investors are unfamiliar with Halma (LSE: HLMA), but that is likely to change following its well-deserved promotion to the FTSE 100 in December 2017. Its full-year results released on 12 June mark 15 consecutive years of record revenues and profits the first time revenues have exceeded £1bn and the 39th consecutive year in which the annual dividend rose by 5% or more. Halma also reported growth in all divisions and all major regions. No other firm I know of can match this dividend growth record. Its low profile is because it is a business-to-business (B2B) firm with products in the areas of safety, health and environmental protection not sold directly to consumers.

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Wide range of products

Halma has four divisions. The largest is infrastructure safety (2017-18 revenue of £349m) with products in areas such as fire and elevator safety. Second is medical (revenue £284m) which makes patient-assessment equipment ranging from ambulatory blood pressure devices to cataract microsurgical tools and eye-health monitoring. The third is environmental and analysis (revenue £259m), whose products include photonics, water pipeline leakage monitors, apparatus for measuring air and water pollution, and equipment for testing food and water quality. The smallest division is process safety (revenue £185m) with products including safety interlocks, pressure relief and gas detection devices.

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This broad range of products essential to customers in many industries is complemented by a wide geographic spread of sales, with 35% of sales in the US, 22% in continental Europe, 16.3% in Asia-Pacific, 16% in the UK and 10.7% elsewhere. This provides diversification by geography as well as by industry.

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The business model is based on a continual development of its products and a portfolio of businesses to maintain a high value-added, high return on sales and high return on capital. To achieve this,the firm emphasises research and development (R&D) and innovation to encourage organic growth, with R&D of 5.2% of revenue. It also makes bolt-on acquisitions regularly to enhance its product range and add new customer groups (see below). Equally it will sell businesses whose products are likely to become commodities or would be difficult to improve to yield increased returns.

Measures of performance

It is easy to see how Halma's portfolio of businesses has developed by noting that revenue has increased from £395m in 2007-08 to £1.08bn in 2017-18. Over these ten years industrial safety revenue has decreased a little whereas medical has increased by roughly three times.

Halma uses two key measures to monitor its own performance ROTIC (return on total invested capital) and organic constant currency growth. ROTIC is effectively post-tax profit divided by total invested capital, calculated by including shareholders' funds and cumulative acquired intangible assets and goodwill to allow for acquisitions.

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Few firms monitor this and it is different from the commonly used ROCE (return on capital employed), which excludes shareholders' funds and acquisition expenditure. Halma calculates both and ROTIC is 15.2% whereas ROCE is nearly five times larger at 71.6%. That is why most companies quote only ROCE their ROTIC is often small. Halma's ROTIC is about twice its WACC (weighted average cost of capital) of 7.7%.

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The second measure, organic constant currency growth, removes currency effects and acquisitions from growth, and was 9.9% for Halma's 2017-18 results a solid performance for a firm of its size.

A final indicator of Halma's success is its shareholder returns (see below). During the 20 years I have been a shareholder, the share price has seen an almost 14-fold increase.

Boosting growth through acquisitions

Halma made five acquisitions in the past year to enhance growth, including Italian manufacturer Argus Security and its distributor, which makes wireless fire safety systems adding to Halma's capability in integrated building fire safety systems. Then it acquired two medical firms, the first being Cardios of Brazil which designs and makes ambulatory ECG and blood pressure monitors supplied to Brazilian healthcare providers. The second was CAS Medical, which supplies clinical-grade defibrillators, haemodialysis machines and non-invasive blood-pressure monitors. Mini-Cam, a pipeline inspection business for water utilities, was acquired last October, and Selco of Spain was acquired to bring new telecoms capabilities to the elevator safety business.

Halma (LSE: HLMA)
Share price1,429pP/E (2018/2019)29
Market cap£5.4bnPEG3.2
Net debt/Ebitda0.87Dividend yield1.03%
Recent results2017-182016-17% change
Operating profit£224m£167m+34%
Normalised EPS45.26p40.21+13%

The success of Halma's business model can be seen from three statistics of interest to shareholders growth in profits, share price and dividend. The share price is up more than three times from 450p in January 2013 to 1,429p recently. The company has also announced record revenues and profits for 15 consecutive years (which span the financial crisis). Then there is the dividend, raised by 5% or more per year for the past 39 years and by 7% or more since 2011.

Halma's forecast price/earnings (p/e) ratio for 2018-19 is 29 and the p/e-to-growth ratio (PEG) is 3.2, so the share price is up with events, but Halma's enviable growth record makes it a buy for the long term. The dividend yield is currently only 1.03% but Halma's exemplary record of dividend increases means this should rise. Had you bought shares in early 2013 at 450p with a dividend yield of 2.5%, you would now have a yield of 3.3% on your original investment.




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