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When it comes to dividend stocks, the London Stock Exchange is filled with opportunities. But few income-producing businesses match the track record of Halma (LSE:HLMA). The safety products conglomerate has enjoyed fairly consistent demand even through volatile economic conditions. And this consistency has ultimately paved the way for almost 46 years of consecutive dividend hikes.
Even in the last 20 years, investors who bought and held onto their shares since 2005 have gone from earning a 4.3% yield to over 15% today on an original cost basis. And this expansion of passive income has also come paired with a staggering 1,865% capital gain return.
At a market-cap of £10.8bn, Halma’s unlikely to deliver another quadruple-digit gain like this, at least in the near future. After all, another 1,865% increase would put the firm’s market capitalisation at over £200bn versus its estimated total addressable market size of £230bn.
Regardless, this still demonstrates ample room for growth. And with demand for testing equipment across the safety, healthcare, and environmental sectors, the company’s long streak of hiking shareholder rewards could be primed to continue. So is Halma one of the best dividend stocks to consider buying right now?
The bull case
There’s a lot to like about this business. As previously highlighted, industry regulation makes Halma’s products essential regardless of economic conditions. That’s why, despite all the chaos created by Covid-19, the firm still delivered record results.
While management has a reputation for being quite acquisitive, these bolt-on-sized deals have kept the financial risk relatively low. And when combined with the company’s decentralised structure, most were able to continue chugging along without disruption, generating ample cash flow.
The success of this strategy is made evident when looking at operating margins and return on equity, both of which continue to sit in double-digit territory at 18.3% and 16.9% respectively. In short, it’s a highly cash-generative enterprise with attractive defensive traits – the perfect combination for a top-notch dividend stock.
The bear case
As impressive as Halma seems, the business isn’t perfect and has weak spots. The acquisitive strategy has historically worked well. But as it’s scaling up, the company’s growing increasingly dependent on new takeover deals to drive growth. That’s because organic revenue expansion has slowed considerably over the years.
Then there’s also the issue of operating in a regulated market. Regulations have actually been a powerful helping hand so far as they act as a natural barrier to entry for competitors and start-ups. However, this is also a bit of a double-edged sword, should changes in the regulatory environment force Halma to update its products to maintain compliance.
Lastly, there’s the issue of valuation. The quality of this enterprise hasn’t gone unnoticed by other investors. Consequently, the shares are currently trading at a price-to-earnings ratio of 37.5 at a dividend yield of just 0.8%.
The bottom line
As a business, Halma looks like it has some terrific opportunities in the long run. But as a stock, it appears most of these growth avenues are already baked into the valuation. And while the long track record of hiking dividends could make the yield more attractive later down the line, I think there are other more promising opportunities for investors to explore in 2025.
